Asia Weekly

Got Rice?

Week Ended: May 9, 2008

Soaring prices on foods and grains in recent months have caused serious international concern. In March and April, the cost of rice rose sharply after several countries, including Brazil, India and Vietnam, announced restrictions on exports to ensure domestic supplies. Officials from the Asian Development Bank estimate that food costs now account for 60 percent of household spending for the poorest families in Asia. The concern is that such high prices will permanently cripple their ability to accumulate savings and escape poverty. It is partly for these reasons that the United Nations suggests we may be entering a "global food crisis."

Officials in many Asian countries have been quick to react to food price inflation, but not necessarily in a positive fashion. For example, India this week banned futures trading on selected food commodities, including soybean oil, rubber, chickpeas and potatoes. Rapid run-ups on such goods prompted officials to clamp down on the futures to combat what they perceived as damaging speculation. As elsewhere in Asia, India is experiencing some of its highest inflation rates in years, and its officials are keen to cultivate a proactive image. They have also said they will ban trading in other futures if political tensions continue to mount.

Some other countries in Asia have begun to ration sales of rice in order to deter shoppers from hoarding the staple grain. Authorities in Thailand, the world's biggest rice exporter, bandied about a scheme for a rice cartel in partnership with Vietnam, Cambodia, Myanmar and Laos to manage rice supplies, but dropped the idea after it was met with heavy criticism. Unlike corn and wheat, which are widely traded around the world, only a few nations export rice. Large producers, such as China, India and Indonesia, consume most of their rice crop domestically. Yet, despite talk of a cartel, the notion of managing tight food supplies may be a bit misplaced: Some countries in the region are reporting bumper crops. For instance, India this week announced anticipated harvests of both rice and wheat that would surpass all historical records.

While inflation is a growing problem for Asia's developing countries, it is not necessarily the region's biggest threat. Rather, the looming risk is the potential for governments to react poorly to inflationary conditions in a bid to quell popular dissatisfaction. In the process, poorly construed policies may actually exacerbate, rather than alleviate, inflationary conditions.

When oil hit $40 a barrel in the summer of 2004, we argued that the increase was a larger sign of Asia's economic progress, than of its weakness. Likewise, mounting prices for food may signal higher demand and growing consumption—generally a healthy sign for the region's development. Households in the region enjoy improved incomes versus a decade ago; thus, consumers can generally weather higher prices, or even spend more on food. This should unlock new market opportunities and new food supplies, provided that markets are able to function. However, the risk is that government intervention such as rationing, price caps and bans on futures will remove incentives for farmers, and damage both domestic and international supply. Asia would be better off directing its energies toward more lasting reforms, such as improving land rights to allow for more efficient, large-scale farming and agricultural production. Currency management in the region might also play a role in the region's bid to stem inflationary pressures. The question for Asia, and for governments around the world, is: Which path will they follow?

Sources: Bloomberg, various news reports

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