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USA Rice Putting high prices in perspective

With daily news stories about skyrocketing commodity prices creating global concern about food shortages, Americans need to remember the key role that a viable farm safety net has played in maintaining the stable and affordable food supply we all enjoy. Current farm law and constantly improving farming practices have helped keep U.S. consumer food prices among the lowest in the world, and Americans today spend only about 10 percent of disposable income on food.

Agriculture is by nature a cyclical enterprise that is always vulnerable to weather, political and economic conditions, and market swings. The current spike in prices - driven in a large measure by increasing demand; commodity purchases by investment funds; the high costs of fuel, fertilizers and other inputs; and urban sprawl encroaching on traditional farmland - is no exception.

When rice stocks are plentiful relative to demand, prices will be low. When rice stocks are low relative to demand, prices will adjust accordingly. Rice demand and supply are constantly responding to market signals.

News reports touting high prices make it seem that farmers are earning huge profits. However, a windfall is hardly in the picture. Non-farmers don't realize that higher input costs - brought on by the relentless rise in energy prices - are offsetting today's near-record farm cash prices for rough rice. Nor are all farmers benefiting from current cash prices. Consider that:

  • Many farmers have already sold a portion of 2008 crops (25 to 30 percent in some cases) at the lower prices.

  • Planting of the 2008-2009 crop is now under way and won't be available for sale until September by which time the prices may have changed regardless of the advance of costs.

  • Farmers must prepare for the high prices to subside - even if costs do not - by reinvesting any short-term profits into their farms

Supply and demand

USDA's Economic Research Service estimates that current ending stocks for U.S. rice - the amount of rice remaining at the end of a marketing year - are at their lowest levels since the 1980-1981 marketing year.

At the same time, global ending stocks are at their lowest level since the 1983-1984 marketing year and world rice consumption has increased 40 percent in the last 30 years - from about 134 pounds per person to 189 pounds per person. Population growth remains high in many countries in which rice is a staple. In Indonesia, for example, population growth has outpaced rice production for more than a decade.

The higher world prices, which have been a steady source for headlines, reflect long-term supply and demand issues, many of which are amplified by unique developments in specific rice markets. Bangladesh, for example, lost much of its rice crop in severe flooding last November.

International picture

Only 7 percent of global rice production is traded internationally which means any government intervention in the export or import markets can have a dramatic impact on rice supply and prices. Because rice is a principal staple in so many diets, particularly in Asia and the Middle East, there is enormous political pressure for central governments in those countries to take strong action to protect local food supplies to reduce the potential for civil unrest resulting from steeply rising consumer prices.

Many rice-importing countries are trying to build up their stocks as insurance against the threat of shortages. Many exporting countries are restricting export sales to protect their own consumers. Government intervention to build up grain stocks and to limit exports to protect local markets, however, can push prices even higher by reducing the amount of rice available for trading. Rice prices have already more than doubled in some markets in the first quarter of 2008 reaching $1,000 per ton.

In Thailand, the world's largest rice exporting nation, exports are at a near standstill amid limited supplies and ongoing concerns about potential defaults by exporters who made forward sales. Some exporters have already canceled some of their contracts because of the difficulty in finding rice in the local market. Hoarding by farmers and traders hoping to get even higher prices at a later date is also rumored to be behind some of the tight supply there.

Other markets:

Vietnam, the world's second largest exporter, reduced it rice export quota by one million tons to 3.5 million tons for the first 10 months of the year. While official reports say Vietnam has ample supply for exports, the country extended a ban on rice sales until June to help stabilize food prices, according to a Reuters report.

China, the world's top producer and consumer of rice, has stopped grain exports to ensure domestic supplies.

Iran, Iraq and Indonesia, which together are expected to import about 2.9 million tons of rice this year, have been delaying their rice purchases to avoid the current high prices, but they will eventually need to purchase more rice, adding more pressure on market prices. Indonesia, which imports and exports rice, has restricted exports to maintain domestic supplies.

India, which first raised its minimum export price to $1,000 per metric ton for non-Basmati rice and $1,200 per metric ton for Basmati, later banned all exports of non-Basmati rice, and has eliminated its 70 percent duties on imports.

Egypt has banned rice exports.

In the United States, we consume about half of our annual rice production domestically with the balance available for the export market. U.S. rice exports this year are projected to jump to 115 million cwt, up nearly 26 percent from the 2006-2007 crop year, and the U.S. remains one of the few reliable, stable sources of rice for global customers. Projections are for a modest increase in planted acreage in the 2008-2009 crop year and we can be confident that global demand for U.S. rice will continue well into 2009.

One thing is certain, although markets are tight and input costs are high, the supply situation will adjust over the coming year so long as there are no major crop failures due to unforeseen circumstances. For American farmers, the key to sustaining a viable rice industry lies in passage of a producer-friendly 2008 farm bill that would sustain America's ability to feed its consumers and the world.

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