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Monday, April 07, 2008

More About The Rice Situation

Bloomberg article, just so you all know I haven't suddenly gone loony on you:
...the run on rice is threatening to disrupt worldwide food supplies as much as the scarcity of confidence on Wall Street earlier this year roiled credit markets.

China, Egypt, Vietnam and India, representing more than a third of global rice exports, curbed sales this year, and Indonesia says it may do the same. Investigators in the Philippines, the world's biggest importer, raided warehouses last month to crack down on hoarding. The World Bank in Washington says 33 nations from Mexico to Yemen may face ``social unrest'' after food and energy costs increased for six straight years.

Rice, the staple food for half the world, rose 2.4 percent to a record $20.985 per 100 pounds in Chicago today, double the price a year ago and a fivefold increase from 2001.
Note the point about the hoarding. If you are a supplier with a lot of rice in store, it makes no sense to release it on the market right now when you probably believe you'll get more for it next month. And buyers for processed rice (rice milled and used in various food products) are probably buying as quickly as they can to keep costs down.

I think that there are two problems with supply. One is that it is just not growing like it used to, and another is that there has been a replacement effect as high grain prices took over. For trade, the export crops are being limited and obviously people are angling to get what is out there, so that drives up prices as well.
``Bread is losing its place as the main staple food and rice is replacing it, and this created the problem,'' Ali Sharaf Eldin, chairman of Egypt's Chamber of Grains, said in an April 1 interview.
For both animal and human populations, relative shift in prices between different grain crops produces a change in consumption.

China's inflation is up well over 8%, so it slapped on a 5% tariff. Indian inflation is rising rapidly.

The rice situation in the Philippines is a drama all of its own. First the government responded to the situation by announcing that rice hoarders would be charged with "economic sabotage" and get a life sentence. The importers then announced that they would not be buying more rice due to fear of lifelong imprisonment. The government next announced that it would import more rice now:
The Philippine government vowed to continue importing rice to meet the population's demand even as the price of rice in the world market has reached US$700 per metric ton. "Right now, the indications is, it is more practical to bring in rice now even at the top 50 per cent duty because the major consideration is to bring that rice as quickly as possible," Finance Secretary Margarito Teves told reporters Thursday.
When people talk about free markets being more efficient than controlled markets and you want to laugh, keep this progression of events in mind.

Hong Kong imports most of its food. Read the saga of one man:
HE just got his pay packet on 29 Mar and it was time to stock up the family's larder.
...
It was only until the couple reached the fifth outlet of a local supermarket that they found out what had happened - through a Singaporean.

Worried about spiralling prices, shoppers in most parts of Hong Kong had cleaned out the supermarket shelves of rice.
...
The relieved man said in the phone interview: 'We finally bought two packs of rice at another supermarket, but it was the 31st store.'

He also paid about 25 per cent more for each pack of rice.
Negotiations with Thailand have apparently produced an agreement for open exports to Hong Kong:
Secretary for Commerce and Economic Development Frederick Ma announced after a meeting with the Thai consul-general that there would be no quota system on rice exports from Thailand to Hong Kong.

Ma also said that the Ministry of Commerce in Beijing had promised that China would make up any shortfall in rice supplies to Hong Kong, which imports 90 per cent of its rice from Thailand.
Rice prices are currently up about 30% in Hong Kong. Most of this action occurred in the first week of April. Heavy buying occurred in March as prices kept escalating, but then Thailand's news about export controls produced an utter panic.

In Egypt, rising food prices led to a proposed strike at a textile mill. The government sent soldiers out to keep people at work:
According to the company representatives, security forces entered the facility and did not budge, trapping the workers inside and forcing the strike to be called off.
...
The planned demonstrations come in the wake of a worsening economic situation in Egypt. Prices of bread, rice and cooking oil, staples of Egyptian daily cooking, have risen by around 50 percent since Jan. 1, leaving many ordinary people in a state of despair as wages have not kept up with inflation.
That's 50% in three months. Despair indeed. Kefeya and the Muslim Brotherhood are gaining support.

Arab Times, Kuwait:
Asma Rushdi must wake up at dawn each day to queue up for the bread ration that will feed her family of eight, as Egypt struggles to cope with shortages that threaten a major political crisis.
...
She is only allowed to spend one Egyptian pound (18 US cents, 12 Euro cents) that will get her 20 pieces of the subsidised flat round bread known as 'baladi' -- the staple of the Egyptian diet.

For Asma, who has to feed her family, including four children and two in-laws, from her husband's meagre monthly salary of 200 pounds (38 dollars, 24 euros), 'bread is everything.'

Egypt is in the grip of a serious bread crisis brought on by a combination of the rising cost of wheat on world markets and sky-rocketing inflation.

The price of bread has increased fivefold in private bakeries, creating panic in state-run bakeries that the staple may run out.
I recommend the whole article. Arresting the private suppliers because the price of their flour is too high would definitely jack up the cost of bread in private bakeries. This is the face of the rising tide of Muslim fundamentalism. Hungry people, promised food and justice.

Bangladesh:
The Governor of Bangladesh Bank, the country's central bank, last week said part of the reserve foreign exchange could be used to build up a food stock to avert any crisis in the short-term. But building up a food reserve at the current international market price would mean import of 1.0 million tonnes of rice would cost more than US$ 1.0 billion.
...
Prof Barakat, speaking at a function at the Bangladesh-China Friendship Conference Centre on April 1, held the free market economy mainly responsible for sky rocketing prices. He said free market economy is never friendly to the poor. Greedy traders can form syndicates to manipulate the prices.

Barakat listed manipulation by middlemen, market speculation, import problems, corruption, high production cost and lack of coordination among the ministries as the reasons for galloping prices of food grains. He said high cost of living coupled with unemployment has led to an extreme situation when around half of the population are passing days half-fed or without food.
I think the situation is largely due to India's controls on export pricing. The government has signed a deal to import from India on a letter of credit.

Just to cap the confusion, the Pakistanis claim to have sufficient grain and rice stocks, but say their exports may drop this year by 1/6th due to power shortages. More on the Pakistani economy. The bottom line is that overall inflation is expected to be above 8%, food inflation has been about 15% in the last year, and the purchasing power of the really poor has dropped about 50%. Half the population is near the danger line on food.


Comments:
Asymmetric information arbitrage.

Some bright person is going to write the definitive paper someday. At least it is obvious for rice. I think the same thing is happening in glod. 1/3rd of annual production is "consumed" and big users contract way in advance to avoid market swings. If you are a mfg staring at a world recession and have contracts for $300 glod delivery and pot prices of $800 why risk it for actually making circuit boards and stuff?
 
Keep up the good work! Housing Panic has taken a leaf and is also highlighting this problem.
 
Thanks for all the links: These rice stories made me think of "Smoot-Hawley" more than any other economic news this year (2008)....
 
Yes Danny, this is a dangerous situation which could foster an outright contraction in world trade.

It also forces governments into deficit spending, plus causes wage increases and boosts worldwide inflation.

Bloomberg on Eastern Europe.

The situation is indeed nerve-racking. Just as the more prosperous economies can afford to pay for the last dollar on fuel, the same economies can pay for the food and even to convert that food into fuel.

What this will do to the populations in the poorer Asian economies is a big question, and it seems that sharply rising costs in those whose manufacturing sectors have been on the rise will cause a rapid escalation of prices, reducing the labor benefit.

Also, these countries are less politically stable. The wealthier are likely to try to move their wealth outside the country for stability's sake, thus withdrawing more money from their economies.

The governments are forced into deficit spending to try to cover the subsidized food and fuel (which control the cost of their labor). This is likely to generate a downward spiral for these economies that won't end well.

Throwing carbon tariffs onto this is an act of economic insanity.
 
Was at local Costco this weekend; short-grain rice was sold out where normally they have many bags of it.

Looks like HK isn't the only place having runs on it.
 
MoM,

The two posts on food shortages point to one of The World's Biggest Disconnects.

The Disconnect is that the Fed claims its actions are not responsible for the run up in commodities prices. Yet what most heavy rice-consuming countries have in common is that they are dollar peggers. That means they continually print local currency to buy up the sea of dollars headed their way, and it is this money-printing that pushes up local prices.

Same thing in places like Argentina, where meat shelves are bare and cars form lines to get their max limit of ten gallons of diesel.

What do all these places have in common? The solution to their "Made in the USA" problem is to revalue their currencies against the dollar. This will stem the dollar tide, stop the local money printing, and contain inflation. They will suffer export declines, but that's preferable to food riots, at least if you want to stay in office.
 
Thanks for highlighting the problem and backing it up with figures and examples.
_____________

Yes, worry about effects and
if dependent on Muslims solving.

_____________
This is so basic.
Was this not cited in the Art of War , i.e., safe border keeping enemies out and having sufficient stores of grain to feed your own people?

If memory serves me, Confucius mentioned this also as necessary for success as a country's leader?


independent
 
MoM,
I still hold out the hope that the rice "dislocation slash temporary slash panic" will convince the latest generation of world leaders that trade penalties are worse than the problem. There just aren't that many left who hold to the olde models. China is one and thus confirming my past previous perfect storm predictions right around the time of the Olympics.

We have enough food and we have enough money to pay for the food. Pretty much for the first time in hisotry. Everything else is blamable on bad policy.
 
David - but rice stocks are extremely low - far lower even than grain stocks. I don't think the US dollar has much to do with this. Rice stocks are down near a 30 year low.

I think rice consumption had tended to shift to meat and grains, then higher prices on those shifted it back to rice while rice yields were growing at a very low rate compared to the last 30 years. Then feed producers probably picked up on rice. To some extent, all the grains can be exchanged in feeds.

I believe fuel prices have something to do with the dollar, but that the grains crisis is probably mostly related to biofuels. Of course the price would go up because of fuel, but not by this much.

One of the reasons that I am so sure the biofuels are significant driver is that the international market for ag equipment is strong and growing stronger. It now seems correlated to the oil extraction capital equipment market.
 
Rob - I think you are being too optimistic. This is not what we are seeing. We are seeing trade regression.

Take the situation in Argentina.

The government seems to be constantly playing with policy to try to hold down internal commodity prices. It is true that they try to keep the ARS trading in a dollar range, but I think govt policy has more to do with their problems. They keep limiting exports on salable farm products, which shifts farmers to stuff they can sell for a profit. I believe government policy is making the situation worse instead of better.

It seems as if all the governments that extensively subsidize food or fuel, whether dollar-pegged or not, are in trouble. But that fundamentally makes sense. Their own policies are going to cause deficit problems one way or another.
 
Rice Jumps to Record on Philippine Imports, Exporter Sale Curbs

April 8 (Bloomberg) -- Rice climbed to a record for a fourth day as the Philippines, the biggest importer, announced plans to buy 1 million tons and some of the world's largest exporters cut sales to ensure they can feed their own people.

Ugh!
 
Soylent Green, Baby!

In all seriousness, the annoyance of the bio-fuels issue is that I'm all for bio-fuel development but as everobody learns in their microecon classes, subsidizing markets lead to distortions. I'm not even a fan of deregulation (lest we talk of mortgage-lending practices of yesteryear, where we need more) but I believe the bio-fuels subsidies was a clever pork-barrel move to give agriculture more money to produce the wrong crops and sell it to the wrong industries. Wasn't the rising price of oil the best "natural" way to promote the bio-fuel industry in general? At $100+ / barel oil, bio-fuels can compete on their own; they certainly don't need a steroid injection from the government to make them competitive.

-- son of zinger
 
Son of Zinger - YES. However, if you look at Dryfly's comments on a prior post, part of the problem here is that we aren't trying for alternative fuels so much as alternative fuels of a certain kind.

I think this is an object lesson on how not to deal with economic supply problems.

Regardless of genesis, we have now created a situation somewhat similar to that arising after the 1929 crash. There was plenty of wheat offered at prices that the hungry could not afford.

Commodity prices which are unaffordable to consumers are not stable.
 
Hording, price gouging, import export
schemes playing out once again.
No regard for even food staple for people.

------------

Remember all what the civilized British did to the Irish people's food supply with absolute disregard for the Irish people?
And, that was the last of a long line of abuses to the Irish.
 
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