How Surging World Rice And Food Prices Could Impact the Philippines

``Some argue rather forcefully that we’re now immersed in “debt deflation.” I understand the basic premise, but to examine double-digit growth in Bank Credit, GSE “books of business” and money fund assets provides a different perspective. To be sure, our Credit system continues to provide sufficient Credit to finance massive Current Account Deficits. And it is this ongoing flow of dollar liquidity that stokes both indomitable dollar devaluation and global Credit excess. Many contend that inflationary pressures are poised to wane as the U.S. economy weakens. I’ll suggest that inflation dynamics will prove much more complex and uncooperative. There is further confirmation of the view that the bursting of the Wall Street finance Bubble will have a significantly greater impact on asset prices than on general consumer pricing pressures.”-Doug Noland, End of the Era, PrudentBear.com

The Philippines once again hit the world headlines.

However, this time it is not due to its intense infatuation with “personality based politics” but for driving up prices of rice to milestone record highs as the world’s biggest buyer of grain.

The projected deficit or shortfall in the national stock level of the primary food staple has prompted the national government to drastically react by suddenly tapping into the world markets where it has been reportedly trying to secure some 1.8- 2.1 million tonnes from Vietnam and Thailand (Financial Times).

Figure 1: Ino.com: CBOT Rice futures at Record High

This week rice futures surged by over 30% (see Figure 1) to set fresh record levels at the Chicago Board of Trade. And this has been equally reflected in global rice benchmarks.

According to the Financial Times, ``Thai rice, a global benchmark, was quoted yesterday at Dollars 760 a tonne, up 30 per cent from the previous daily quote of about Dollars 580 a tonne, according to Reuters data. But some traders said the jump was not as steep, adding that Thai rice had already hit about Dollars 700 a tonne this week.

``Rice prices have doubled since January, when the grain traded at about Dollars 380 a tonne, boosted by strong Asian, Middle Eastern and African demand, and tight exportable supplies across Asia, according to the US Department of Agriculture.” (emphasis mine)

Nonetheless, rice relative to other major agricultural commodities is the least traded in the world since most of the major rice consuming countries are close to or have reached self-sufficiency levels. It is reported by the UN’s Food and Agricultural Organization (FAO) that annually “only 7% of the world’s production is traded across international boarders”.

That was then.

Price Inflation’s Accelerating Momentum

The dynamics are quickly changing.

Supplies are rapidly being depleted around the world. According to the Financial Times, ``Global rice stocks are set to fall this year to about 70m tonnes, the lowest level in 25 years and less than half the 150m tonnes held in inventories in 2000.”

Figure 2: The Economist: A Reversal of Long Term Declining Prices on Supply

Following 6 out of eight years where demand has surpassed supplies, inventories as measured by the stocks-to-use ratio has fallen to a precariously low level similar to that in 1976 with roughly over 70m tonnes of reserves at a time when population was about a little over 4.1 billion compared to today’s 6.6 billion.

Figure 2 from the Economist shows that despite the rising rice production over the decades, the recent price activities imply for a reversal of the long term declining trend, which also appears to reflect stronger increases in demand relative to supply.

Figure 3 from UN’s FAO shows of the world’s largest major exporters of rice.

In FAO’s 2007 Rice Market Monitor it noted that

``The 2007 forecast of global carryover stocks has also been lowered since September by 5 million tonnes to 102.4 million tonnes, which would represent a 1.2 million tonnes drop from opening levels. The expected decline suggests that production in 2007 would fall short of utilization and that drawing from world reserves would be needed to bridge the gap. The expected year-to-year contraction is anticipated to affect mostly the major importing countries, except Indonesia. Although as a group, the traditional exporting countries are foreseen to end their 2007 seasons with larger inventories, much of the increase would be concentrated in China. The situation in the other traditional exporting countries is less buoyant, since Australia, Cambodia, Thailand, the United States and Viet Nam are all anticipated to end the season with lower inventories.” (highlight mine)

Growing demand and production shortfalls have likewise led to major policy changes among nations.

Major exporters as Vietnam, India, Egypt and Cambodia (International Herald Tribune) have imposed restrictions (on a varying scale: Vietnam to reduce exports by 22%, India pegged new prices at $1,000 per ton, Russia imposed export duties) on rice exports. Thailand is yet in public discussion and risks following the same “protectionist” measures.

Next, present shipments are being consummated to comply with the recent contracts entered into by governments through state owned companies, with virtually no private contracts signed. Basically, governments have cornered both the buy and sell side of the trade equation.

So far, all these concerted restrictions have effectively taken off about a third of rice supplies in the international markets, reduced liquidity and thus, have contributed immensely to the ongoing price volatility in the world market.

Political Impact of Rising Food Prices

Figure 4: UN FAO: Surging Food Price Indices

No, this is not entirely about the issue of rice; it is about food in general…and on a global reach.

As you can see in Figure 4, global food prices have been surging almost across the board-as dissected per group (left) and as generally classified (right)- and the momentum of increases has recently accelerated.

Notes the UN FAO, ``In 2007, the FAO Food Price Index averaged 157, up 23 percent from 2006 and 34 percent from 2005. Except for sugar, prices of which declined sharply, international prices of other major food commodities rose significantly in 2007. Dairy, cereals and vegetable oils made the strongest gains, supported by tight supply and demand situation. In December, the food index averaged 184, the highest recorded monthly average since the start of the index in 1990.”

So as the food spectrum appears to be taking the heat from heightening episodes of “price inflation”, recent political events imply “inflation” getting rapidly unhinged in the broader segment of the world.

Since rice is a staple of more than 2.5 billion of the world’s population (mostly in Asia) this has political significance.

Recently riots have erupted around the world in Guinea, Mauritania, Mexico, Morocco, Uzbekistan and Yemen associated with soaring food prices (New York Times). Since rice is also a staple in Africa, small countries as Cameroon, Burkina Faso and Senegal have been suffering from social unrest (Financial Times).

``But food protests now crop up even in Italy. And while the price of spaghetti has doubled in Haiti, the cost of miso is packing a hit in Japan”, reports the CNN.

Meanwhile, sporadic violence in Egypt has prompted President Hosni Mubarak to require the army to “bake” or ramp up bread production (upi.com)! As you can see, desperate problems call for desperate measures.

In 2007, we saw a prelude to this antsy over food such as the "Tortilla Crisis" in Mexico, the "Pasta Protest" in Milan, and riots and stampede in China over cooking oil. Today we are simply witnessing the aggravation of such “food inflation” tensions.

Present And Prospective Policy Responses

Naturally, the typical response to politically charged events by governments is likewise “political” in nature or as we long described- the treatment based solution directed to appease the short term demands of voters or the populace than over structural reforms.

The Philippine government has not reached a point that requires its 200,000 strong military personnel to operate as bakers or farmers, but we are closely getting there.

So aside from the frantic buying in the overseas market to shore up local stockpiles whose import bill is projected to rise to P 60 billion with Php 21.7 billion serving as rice subsidies through the National Food Authority (Philippine Daily Inquirer), the government plans to relax or ease tariffs import duties similar to oil.

Currently tariffs for rice and corn stand at 50% and 40% (!!!), according to the Philippine Daily Inquirer. Imagine the astounding amount of subsidies or “safety nets” granted to our farmers (meant to protect them from external competition) throughout the years and yet they have remained “poor”, uncompetitive and “unproductive”!

The government is also reportedly planning to allow for greater private sector participation for importation and to expand rise production expenditures to US $68.5 billion, while the social welfare services intends to issue rice coupons to the depressed “poor families” sectors of the society (reuters alernet.org). I wonder how many of these “redistribution” goodies would genuinely end up with the needy and not to “poor” relatives and associates of those in charge—of course at the expense of taxpayer’s money.

In addition, for public display of government in action or what I call the “superman effect”-people love to see superheroes rescue the victims (e.g. falling from buildings or emancipation from the clutches of the antagonist/s) and not by the unappreciated preventive actions-aimed against “profiteers”, the government intends to “toughen up” against “hoarding” (Philippine Daily Inquirer). Are we seeing more opportunities for extortion or corruption?

If all these measures don’t meet their desired end, the probable next line of action would be bigger subsidies at the expense of the fiscal conditions, imposition of price caps or ceilings or rationing or forced appropriation of private properties-all of which means more inflationary policies, market distorting measures and more socialism of the marketplace.

All this suggest the prospective impairment of the country’s balance sheets which will all be reflected in our reduced purchasing power. The fate of the Peso will depend on who among the relative currencies would be inflating more. As we have pointed out in the past see February 18 to 25 edition [Surge of Food Prices Presage Armed Conflicts!], rising food prices have coincided with armed conflicts and the rise of tyrants and despots. Could we risk the emergence of a new dictator?

Nonetheless, if there will be any political cause that that could unseat the present administration, it is not from the angle of “truth” but from “hunger”. Thus, expect more rescue packages at the expense of the taxpayer.