Why Rice Is A Big Deal For The Economy?

"Give a bowl of rice to a man and you will feed him for a day. Teach him how to grow his own rice and you will save his life."͟  Confucius

The year 2007-08 is remembered for the Global Financial Crisis, starting with the collapse of Lehman Brothers. Not many remember that during the same time period, the world had also seen a rice crisis. Yes, a crisis in the humble foodgrain that hardly gets noticed or spoken about.

After increasing slowly and steadily from historic low prices, the world rice prices tripled in just six months during 2007-08. The international trading price of rice moved from $300 per tonne to nearly $1200 per tonne in just a few months. On the other hand, some sections of the global rice farming communities ‒ especially those with large farm holdings and with market connects for distribution ‒ benefited from the higher prices. On the flip side, farmers who had planted more rice crops when prices were high and ended up harvesting them when the prices crashed incurred losses.

The biggest trigger for this crisis started with Vietnam banning rice exports. Other nations including India, China and Cambodia quickly followed suit with rice export bans, effectively shutting down the global rice market. The outcome was sheer panic. For example, the Philippines ended up buying as much rice in four months as it usually imported in a full 12 month cycle! The global importer community went into a tizzy and within a week, rice prices in the global markets had doubled. Some nations saw and even indulged in panic buying, and social unrest issues occurred due to high prices in the domestic retail markets.

*Ukraine war & old memories

The still ongoing Russian invasion of Ukraine has dented global food chains and other supply chains further. Wheat has been the most impacted food crop, with millions of tonnes stuck in Ukraine, impairing food supplies globally. It is a question of urgency to balance food security for nations that consume wheat in their food chain. Vegetable oil and corn prices are also surging. Food-importing nations are understandably worried. Food prices have been on the rise over the past few months, inevitably adding to inflation. The cost of oil, fuel, energy, and fertiliser ‒ all part of the ‘farm to plate’ chain ‒ has been increasing.

As an important component of farming, fertilisers are critical to having an adequate supply. India imports di-ammonium phosphate and fertilisers containing nitrogen, phosphate, sulfur and potash. Fertiliser prices are globally higher due to increased gas prices. Russia and Belarus export over 40 per cent of the world’s potash purchases. A shortage of fertilisers could easily affect the production of crops. The world has not yet moved to commercially viable, better yielding non-fertiliser crops.

This puts the spotlight on rice. So far, there is a sufficient quantity of it, for prices to hold up. With the wheat shortage, many farm markets have started using rice as an alternate cash crop to encash. They are increasing rice production and increasing rice prices with increased bargaining power in the commodity market. The United Nations’ Food and Agriculture Organization Food Price Index indicates that international rice prices have been increasing over the past six months and are at a 12-month high.

For example, economic crisis-ridden Sri Lanka is pushing for higher rice production to avoid shortage and further public panic. The world’s fifth largest rice producer and third largest rice exporter ‒ Vietnam ‒ and sixth largest rice producer and second largest rice exporter ‒ Thailand ‒ are working on a coalition to boost better prices for their produce.

*Rice & India

Over the past few months, various domestic pressures for self-sufficiency have forced food export bans ‒ be it Indonesia (palm oil), India (wheat) and others. If wheat were to become more expensive and more in short supply, probably rice would become the substitute food commodity. Rice matters, simply because it’s the staple food for over half the world’s population. It is also food for a large population of the undernourished in Africa and Asia.

Over 50 per cent of the Indian population consumes rice, as its primary sustenance foodgrain. India is the second largest producer of rice in the world. India cultivates over 6,000 varieties of rice and supplies rice to over 100 countries

With a shortage of rains in parts of India this year, the rice planting area is estimated to have shrunk by nearly 13 per cent. This makes the rice plantation coverage to be the smallest in the last three years. Rice cultivation needs approximately 5,000 litres of water just to produce one kilogram of grain. The crop needs a steady water source, mainly monsoon for most parts of our country. India being a major global rice exporter, could add to the global food supply concerns, if the overall harvest does not improve. If geographic disparities in rainfall persist, it could have a detrimental impact on crop production, negatively impacting economic growth and inflation.

India accounts for 40 per cent of the global rice trade, and the government has already curbed wheat and sugar exports to safeguard food security and control domestic prices. There is a rightful concern that a drop in rice production could complicate India’s fight against inflation and trigger restrictions on exports. Any reduction in India’s rice production could have implications for billions of global rice consumers.

Rice could prove a challenge for the inflationary trend in India. The retail inflation has been above the Reserve Bank of India’s tolerance limit of six per cent this year, prompting a sharp rise in interest rates. It has already increased its repo rate to 5.4 per cent, thereby signalling increased costs of borrowing. If the price of rice increases further, and if the monsoon is not normal, rice could add to inflationary pressures. A good monsoon and a good crop output, however, do not indicate trade assurance. We have had mixed policy indications about commodities so far, due to our domestic compulsions. In April this year, India was keen to increase its grain exports to mitigate the pricing and supply pain felt by the world. Just a month later, it announced a wheat export ban.

Suddenly, the humble rice is a critical commodity to watch and track. Conversations around its stockpile, acreage of rice production and farm productivity have to be had in detail, and ahead of time. Hopefully, we shall respect every grain of rice now!

The author is Corporate Advisor & Independent markets commentator

Twitter : @ssmumbai