Page 1 of 2 Japan ducks rice-crisis solution
By C Peter Timmer
The Group of Eight summit of the world's leading industrial nations held in
Japan this month was a missed opportunity for the host nation to take center
stage in helping to resolve the world rice crisis.
Some relief from the peak rice prices seen in April has already been achieved,
in part due to an early announcement by Japan that it would release some of its
imported rice stocks, but there has been no follow-up by the government to
sustain the momentum achieved in May, and to keep rice prices falling back to
levels more affordable by poor countries and poor consumers.
The world rice market remains in crisis. Export prices soared to US$1,100 per
ton in April, from $375 per ton in December [1]. In
April, there was concern that if action was not taken, prices might double
again, returning them to stratospheric real levels last seen during the crisis
in 1973-74.
The loss of rice production in Myanmar due to Cyclone Nargis complicated the
task of stabilizing the world rice market. The announcement in May of a release
of rice stocks by Japan helped bring rice prices down, to between $700 and $800
a ton in July. But the possibility of cutting them in half by the end of June
was not realized, as Japan took no further steps, despite considerable
international pressure.
Even after the US government took the lead in making this happen, it seemed
that Japan was not willing to "take yes for an answer". To its credit, the US
needed to get US rice growers on board with the plan, a potentially difficult
roadblock but one that was successfully overcome. The mystery is why Japan has
failed to respond.
Why food aid isn’t the answer
The alternative to getting rice prices down is hard to contemplate. Unless
prices are brought down quickly, hundreds of millions of people will suffer
from hunger and malnutrition, and many will die prematurely.
Food aid won’t do the trick. There is simply no financial, logistical or
political way that the world’s poor rice consumers can be saved by food aid.
Instead of focusing solely on marshalling food aid resources, the global
community needs to take immediate action to help solve the crisis. What is
needed is leadership on getting new rice supplies to the world market, and the
G-8 Summit seemed the ideal platform for action, because Japan is sitting on a
significant source of these new supplies.
How can this be done? After India banned all non-basmati rice exports in
February, Vietnam largely withdrew as a seller from the export market (this
month, when exports resumed), and Thailand struggled to maintain rice exports
at last year’s near-record level, which required drawing down government-held
stocks. As a result, the new rice supplies must come from a non-traditional
source. Fortunately, such a source is available: unwanted rice stocks in Japan.
Because of its World Trade Agreement commitments (made under the Uruguay Round
of talks), Japan imports a substantial amount of medium-grain rice from the US
and long-grain rice from Thailand and Vietnam. Tokyo, however, seeks to keep
most of this rice away from Japanese consumers (perhaps fearing a realization
that the taste of foreign indica rice is not so bad, and a bargain compared
with the $3,900 per ton for locally produced short-grain varieties of japonica
rice).
Under WTO rules, the government cannot re-export the rice, except in relatively
limited quantities as grant aid. So the Japanese government simply stores its
imported rice until the quality deteriorates to the point that it is suitable
only as livestock feed and sells it to domestic livestock operators. Last year,
about 400,000 tons of rice were disposed of in this manner, at a huge budget
loss and displacing an equal quantity of corn exports from the US, thus
displeasing another constituency, US corn growers.
Japan has more than 1.5 million tons of this rice in storage - roughly 900,000
tons of US medium-grain rice and 600,000 tons of long-grain rice from Thailand
and Vietnam. Most of this rice is in good condition, and is incurring large
storage charges. Japan should be very happy to dispose of this rice to the
world market, but it cannot do so without US acquiescence. (Technically,
Thailand and Vietnam also need to give approval for rice supplies originally
imported from their countries to be released to world markets.)
The US was reluctant to take the lead in giving Japan permission to re-export
its WTO rice, out of fear of potential political repercussions from the US rice
industry. Re-exporting the rice from Japan would mean additional competition
for US rice exports. But at the moment, there is no competition - that is
precisely the problem.
The rice in Japan is needed immediately. By the time the next rice harvest in
California is available for export late this year, the Japanese rice could
avert a crisis, but the world market will still need every ton available. It is
even in the longer-run interests of US rice growers to prevent this crisis, as
the inevitable result of continued high prices will be energetic but
inefficient self-sufficiency programs in countries that import rice. As a
result the US rice export market could actually shrink.
The simplest mechanism to stop the crisis has the US authorize Japan to sell
its surplus rice stocks directly to the world market at a price that covers its
acquisition and storage costs, probably below $600 per ton, to whichever
importer wants to buy. When this happened once, the Philippines was at the
front of the line, and quickly arranged to buy 300,000 tons of the Japanese
stocks. But other countries have urgent import needs as well, and no additional
supplies have been forthcoming.
It is important to realize that this additional rice does not "solve" the
world’s rice problem - rice at $600 per ton is still a major burden for the
poor - but it has the potential to prick the speculative rice price bubble.
Indeed, immediately after the announcement of the Japan-Philippines deal, world
rice prices fell by $200 a ton over a week.
An alternative, perhaps more politically attractive, mechanism, was also open
to Japan at the G-8 summit. It had US approval to donate substantial quantities
of the Japanese rice to the World Food Program (WFP), which is appealing for
additional food aid supplies. The WFP needs at least 450,000 tons of rice for
its regular operations, and much more will be needed this year because of the
disaster in Myanmar. Instead, Japan chose to offer additional funding for food
aid, not actual food supplies. At no time during the G-8 Summit did the US
pressure Japan to release more of its rice stocks to either the WFP or directly
to the world rice market.
As it prepared to take the world stage as host of the G-8 summit, it seemed
like a golden opportunity for the Japanese government to offer the rice as food
aid directly to interested parties and finance the donations from its own
budget as humanitarian assistance. With Myanmar reeling from the aftermath of
Cyclone Nargis, the WFP’s proposed budget will clearly be inadequate. There was
an attractive headline here: "Japan steps in to solve the world rice crisis."
It turns out to have been a missed opportunity.
Why is there a world rice crisis at all? There is no single reason, but panic
and hoarding are playing a big role. World rice production in 2007 was at an
all-time high, with forecasts for 2008 to set another record. The world’s rice
consumers have not suddenly started eating more rice. World trade has not
collapsed - the volume of exports in the first four months of 2008 was about
20% higher than in the same period in 2007. And world rice stocks, excluding
those held by China, have been steady the past five years. These trends do not
look like an impending crisis, and yet world rice prices have exploded.
It is not just the international market that is in crisis. From October 2007 to
March 2008, domestic rice prices increased by 38% in Bangladesh, 18% in India,
and more than 30% in the Philippines. These are very large increases for poor
people who depend on a single staple food for the bulk of their caloric intake,
and typically spend 20% to 40% of their income on this one commodity alone.
More than 3 billion people depend on rice for their daily food and half of
these are very poor. Rice prices approaching $400 a ton meant a meager
existence. Rice prices at $1,100 a ton mean starvation. If there is plenty of
rice in the world, why have prices exploded?
The world rice crisis has crept up on the United States, focused as we are on
the ethanol debate and the high price for bread and gasoline. The US is a major
exporter of rice at more than 3 million tons per year, placing US fourth in the
export ranks behind Thailand, India and Vietnam. In those countries, and in
major importers such as the Philippines and a number of countries in Africa,
rice is a matter of life and death. In the US, it was national headline news
only briefly when Costco and Sam’s Club restricted the number of bags of rice
individual consumers could purchase.
Rice is a very different commodity from corn and wheat. Corn is the ubiquitous
"multi-end-use" commodity, providing tortillas and corn meal for direct human
consumption, high-quality feed stuffs for livestock, high-fructose corn syrup
as a basic sweetener for the processed food industry, and now ethanol for fuel.
Wheat also has multiple end uses, although only the Europeans use much for
livestock feed. Rice is the quintessential "staff of life." Nearly half the
world’s population depends on it as their daily food. Little rice is fed to
livestock and none is used for bio-fuel production (unless the proposal by the
Japanese Ministry of Agriculture, Fisheries and Forestry to use its imported
rice stocks as raw material for bio-fuel production is actually implemented).
Rice prices have been rising steadily on world markets since 2003. The
underlying factors behind this trend in recent years are similar to those
pushing up other food prices. Four basic drivers seem to stimulate rapid growth
in demand for food commodities: first, rising living standards in China, India
and other rapidly growing developing countries, which lead to increased demand
for livestock products and the feedstuffs to produce them; second, stimulus
from mandates for corn-based ethanol in the US and the ripple effects beyond
the corn economy that are stimulated by inter-commodity linkages; third, the
rapid depreciation of the US dollar against the euro and a number of other
important currencies, which drives up the price of commodities priced in US
dollars; and finally, increased speculation from new financial players
searching for better returns than in stocks or real estate. Underneath all of
these demand drivers is the high price of petroleum and other fossil fuels.
The surge in food prices that has attracted so much attention did not start
until 2005 or so, depending on the commodity. Substantial speculative
investments in food commodities seem to have started only in mid-2007, when
heavy speculation from financial investors with little understanding of food
commodities played an important role in propelling non-rice prices higher. Such
speculation played a less direct role in driving world rice prices up, although
speculative activity on rice futures markets in Chicago and Bangkok exploded in
February this year and remained high until rice prices peaked in April.
For some food commodities, especially wheat, there have also been significant
supply shocks from drought and disease. Normally these would cause only modest
increases in price, with supplies from stocks and a pattern of year-round
production in the northern and southern hemispheres dampening upward movements.
But wheat stocks were at historic lows even before the bad crops rippled around
the world in 2007 and the spike in wheat prices has been dramatic. The recovery
of Australia’s wheat crop, currently being harvested, has caused a significant
decline in wheat prices since early April.
Panic and hoarding
Thus the trebling in rice prices has been driven to a greater degree
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