Are we headed for a repeat of the 2007-08 rice price crisis?
The 2007-08 rice price spike seems like it was ages ago considering the calmness in the rice market in the past few years despite El Niño and other weather-related scares. Rice prices in the international market have stabilized in the past few months after a steady decline since mid-2014. There has been some support for rice prices in the past few months because of weather scares such as drought in India, Indonesia, Thailand, and the Philippines, but this has not been enough to turn things around.
Despite the current stability in the rice market, there are reasons for concern about the direction of the market in the medium term (mid- to late 2016). The rice stocks of five major exporters (India, Thailand, Vietnam, Pakistan, and the United States) continue to slide since reaching a peak of nearly 41 million tons in 2013 (Fig. 1). According to USDA data, the biggest drawdown of stocks in these countries is underway this year, with a 40% drop from last year, to reach 19 million tons by late 2016.
The majority of the 13 million tons drop in total inventory will come from the top two exporters, India and Thailand. To put things in perspective, the combined stocks of India and Thailand are projected to be around 16 million tons by the third quarter of 2016, around 70% lower than what they used to be in 2013. With Thai rice stocks dropping to 5 million tons by late 2016, the buffer the Thai mortgage stocks provided to the market in the past couple of years will be almost gone by the end of this year. But, more significantly, India’s deteriorating grain situation is particularly worrisome to the market. In 2013, India exported 24 million tons of grains (rice + wheat + corn): 10.5 million tons of rice and 13.5 million tons of wheat and corn together. In 2016, the combined exports of wheat and corn are projected to drop to 1.5 million tons on the back of weather-related supply problems. Some even predict India to be a net importer of wheat and corn in 2016. The rice situation is not as bad as that of corn and wheat, but Indian rice exports are expected to drop this year also.
As per the information available on the Food Corporation of India website, the procurement stock as of 1 February 2016 was close to 29 million tons (milled rice equivalent) (Fig. 2). This is not as much as it was three years ago but seems to be at an acceptable level. The problem for rice is likely to come from wheat, with an expected lower harvest in April and possible upward swing in the wheat price, which might drag rice prices upward, thus creating anxiety among policymakers. Ultimately, the 2016 wet-season rice crop, which accounts for nearly 90% of the total crop, will ultimately determine whether or not the government decides to restrict the flow of rice out of the country to stabilize domestic prices.
Uncertainty about India’s situation in the coming months does not augur well for the international rice market and global food security. In addition, major Asian importers, such as Indonesia and the Philippines, are battling their own weather-related supply uncertainty and low inventory and have been aggressively procuring rice from the international market.
This will be an interesting few months for the global market, which faces a tight supply situation for the first time since 2007-08. If the 2016 wet-season crop turns out to be normal in the major rice-growing countries, then the pressure on rice prices will be significantly relieved and the market will likely remain fairly stable through early 2017. However, if the season is rocked by some major weather events such as drought, cyclone/typhoon, and flooding in a few major countries, the mettle of the market will definitely be tested. With limited Thai rice stocks in the warehouse, it remains to be seen how major exporting and importing countries react to such uncertainty. If they panic similar to 2007-08 and resort to excessive buying and export restrictions, then another price spike is in the offing. However, if they keep their cool and remain rational regarding their needs, the market price may still go up, but only to a level that is consistent with market fundamentals.