"RICE: WHY IT DESERVES SPECIAL ATTENTION"

 

 

 

A SPEECH BY

DR. RONALD P. CANTRELL

THE DIRECTOR GENERAL

OF

THE INTERNATIONAL RICE RESEARCH INSTITUTE

 

 

 

To The

ANNUAL MEETING AND SCIENCE INNOVATION EXPOSITION

OF

THE AMERICAN ASSOCIATION

FOR THE ADVANCEMENT OF SCIENCE

 

 

 

"Open Markets and Global Food Security"

 

17-22 February 2000

Washington DC

 

 

 

ABSTRACT

Almost two thirds of the world's population depends on rice for food and yet only 6.6 per cent of total rice production is traded on international markets. This is because most Asian governments consider rice too important to national stability to allow free and open trade. Any government that cannot guarantee the food security of its citizens does not expect to stay in power long. The international rice market should be developed but not while ignoring rice's importance as a staple food to millions of poor in the developing world. To ensure the poor do not become victims, instead of beneficiaries, of open markets and globalization, reliable supplies of cheap food must be protected. Science has contributed much to previous increases in rice production that have helped keep the poor fed and so ensured stability. However, the opening of international markets will require sound polices as well as good science if the poor rice eaters of the world are to truly benefit from such changes.

 

 

Distinguished guests, ladies and gentlemen,

Thank you for this opportunity to speak to you today on the topic of rice and why it deserves special attention in the context of open markets and global food security. For those of us familiar with agriculture in general, and trade in particular, it is perhaps an all too familiar demand that this crop, or that product, deserves special attention.

But I hope by the time I finish this presentation that -- even if you don't agree that rice deserves special attention -- you will at least have a clearer understanding of the very major implications of an opening up of the international rice market, especially in terms of its potential impact on millions of the world's poor.

By special attention, I don't mean that the international rice market should not be liberalized, but that if it is, such a move may require controversial measures like the imposition of tariffs to ensure the poorest of the poor are not unfairly affected by any sharp changes in international markets.

Put simply, millions of poor have no choice but to eat rice and if the price is too high then they do not eat.

SLIDE 1: THE CALORIFIC INTAKE FROM RICE (1996)

(Bangladesh, Myanmar, Indonesia, Vietnam, India,

Philippines and Thailand)

This is why rice is so different from any of the world's other major grains. About three-quarters of the world's poorest depend on rice not only for their food and livelihoods, but also because it plays a key role in so many cultures and societies.

As a maize breeder from Texas, the initial idea that rice was different was not one that I could relate to easily. But there is now no doubt in my mind that while the international rice market is already developing in the same way as other grains or commodities such changes must be handled carefully. For many governments there is simply too much at stake, but also because the world's tens of millions of poor rice farmers and consumers may simply not be ready or able to cope.

As an institution IRRI is neither for, nor against, liberalization of the international rice market, and despite what I will discuss in a few moments, we would not insist on measures such as tariffs to stabilize prices. What we are concerned about is that all those involved and affected by such changes -- the farmers, the traders, the consumers and the policy makers -- all understand the very significant ramifications such liberalization will have.

SLIDE 2: INDONESIA

"Expenditures on rice are 20 per cent of total expenditures for the poorest 25 per cent of the urban population."

To give you just one example, in Indonesia the poorest 25 per cent of the population spend on average 20 per cent of their total expenditure just on rice. Therefore, their ability to adjust to any sudden changes in price caused by conditions in the global market would only come at great cost to other important areas of expenditure such as the education of their children.

Over the next few minutes I would like first to set the scene and explain the history and present state of the international rice market. I will then describe the changes that we expect to see take place over the next few years before looking at the effect of these changes and then finally suggesting some ways that the industry can prepare for all such developments.

SLIDE 3: PIC OF MEN EATING RICE

"In much of Asia, cheap rice has been the propelling force behind years of economic, political and social stability"

Overview

In much of Asia, cheap rice has been the propelling force behind years of economic, political, and social stability. Rice has kept the continent nourished, employed, and peaceful.

The true Asian miracle hasn’t been stunning economic development, it’s been keeping people fed.

This vast continent grows--and eats--more than 90 percent of all the world’s rice on more than 250 million tiny farms, with most Asians eating rice two or three times a day. Half of every harvest never even leaves the farm: it feeds the family that planted it. Hundreds of millions of poor people spend half to three-fourths of their incomes on rice--and nothing else. For these people, rice anchors their precarious lives.

SLIDE 4: GRAPH OF TRENDS IN WORLD RICE PRODUCTION AND PRICE

Farmers have grown an astounding 2.5 percent more rice each year since 1965. This "extra rice" feeds an additional 600 million people, and has stayed neck and neck with the ever-growing demand. Increasingly bountiful rice harvests from the late 1970s through the late 1980s--mainly thanks to high-yielding modern varieties, more irrigation, and more access to credit--have accounted for nearly four-fifths of this growth. The result? A stunning drop in the real price of rice.

This cheap rice is seen by many as the single most important contribution IRRI has made to stability in Asia. This rice has helped to reduce poverty by enabling the rural landless and the urban working class to buy more food with the same income.

SLIDE 5: GRAPH OF RICE YIELD AND PER CAPITA PRODUCTION

IN ASIA

But it's important to note that another billion hungry rice eaters will be added in Asia by 2020. Then, more than four billion people -- or over half the world’s population -- will depend on rice. And, as you can see by this slide, in the 1990s for the first time per capita production and yields merged suggesting that it is becoming increasingly difficult to grow the extra rice needed for each extra person.

More mouths to feed translates into a need for one-third more "new rice" than what is eaten today. The figures are daunting. Farmers must consistently produce an extra 6.7 million tons of unmilled rice -- every year -- without fail. Even if this can be achieved, it will merely maintain current nutrition levels, which are already inadequate for hundreds of millions of people.

Can an increase in world trade help ? Unlike many other major commodities which are all traded extensively, only 6.6 percent of all the world’s rice was traded internationally last year. The rest was eaten in the country where it was grown, making the prospects for alleviating rice deficits through imports a bit harder than many may have thought.

SLIDE 6: PIC OF RICE HARVESTING MACHINES IN CALIFORNIA

"When the WTO's expected measures are fully implemented

the years of protecting domestic rice industries will haunt high cost producers."

Exporting surplus rice just doesn’t pay for middle- and high-income countries, which generally grow only enough rice to feed themselves. In the late 1980s, the Food and Agriculture Organization of the United Nations (FAO) reported that it cost about 17 times more to grow rice in Japan than in Thailand and Vietnam, and about 10 times more than in Australia and the United States.

High-cost domestic production on small family farms prohibits richer Asian countries from competing with poorer Asian countries, where wages are low and family labor is still available, and with agricultural giants, such as Australia and the United States, which reap economies of scale on large farms.

When the WTO's expected measures are fully implemented, beware: the years of protecting domestic rice industries will haunt high-cost producers. When domestic markets are opened, cheap imported rice will flood the market, driving down prices, encouraging farmers to abandon their rice fields to seek employment in urban factories, and panicking governments about food security.

With economic growth, the comparative advantage in rice shifts to poorer countries. But as these countries struggle to feed their own burgeoning populations, as in Vietnam and eastern India, the big question will be will they have rice to export?

SLIDE 7: MAP OF THE WORLD SHOWING WESTERN AND SOUTHERN AFRICA AND SOUTH AMERICA

Unfortunately, I cannot answer that, but we know that as rich countries produce less rice, Asia may have to look beyond its borders to feed its people. The FAO estimates that 20 million hectares of river valleys in western and southern Africa, and 20 million hectares in South America, could be planted with rice. Rice prices must increase substantially, however, for this to become economical.

Within Asia, the prospects of bringing additional land into rice cultivation are limited. Monsoon-dependent eastern India has considerable excess capacity in rice. If scientists succeed in developing appropriate high-yielding varieties for the drought- and flood-prone environments, rice production could increase there substantially. But if poverty is reduced while population growth goes unchecked, the two may be a hungry combination that will devour every single additional grain of rice eastern India can grow.

SLIDE 8: RATIO OF EXPORTS TO DOMESTIC PRODUCTION: (Thailand, Myanmar And Cambodia)

Only Myanmar and Cambodia appear to have the potential to produce enough surplus rice to meet potential shortages in other Asian countries, but investment costs will be steep. And, this extra rice may not even add much to the world rice market because exports from Thailand and Vietnam will most likely decline.

The achievements of IRRI and its many partners in rice-eating Asia have repeatedly helped postpone collisions between food production ability and population demand. Because the easy gains have been reaped, the need for more sophisticated technology is even more urgent now than in 1960, and this is especially the case with the coming liberalization of rice markets which will place a premium on well managed rice production systems.

One of the major achievements of Indonesian agricultural policy in the past few decades has been the successful stabilization of domestic rice prices. For a period of nearly 30 years, Indonesian rice farmers and consumers were successfully insulated from severe instability on the world rice market, especially during the 1970s, at relatively low cost.

SLIDE 9: ANNUAL FLUCTUATIONS IN REAL WORLD RICE PRICES

Today, Indonesia still faces the same question: how should farmers and consumers be protected against rice price instability? Under a more liberal trading regime, where the private sector can import from the world market (subject only to a tariff), instability in domestic rice prices can originate from three sources.

First, fluctuations in domestic production can cause fluctuations in domestic prices. Second, changes in world market rice prices will be translated into changes in domestic prices if private imports are allowed. For example, a downward fluctuation in world rice prices will encourage private sector traders to import cheap rice in order to sell at the relatively high prices on the domestic market. These imports will put downward pressure on domestic prices. The reverse would happen if there was an upward movement in world rice prices. Exports would be encouraged, and there would be upward pressure on domestic prices. Thus, price instability on world markets will be translated into price instability on domestic markets.

Third, volatility in Indonesia's rupiah exchange rate would cause changes in the rupiah equivalent price of rice in the world market, which will then affect domestic rice prices just as if the world market dollar price of rice had changed at a constant rupiah exchange rate. Imagine that the rupiah depreciates significantly. This depreciation increases the amount of rupiah that a trader can get for exporting rice at a fixed dollar price. Rice exports will tend to raise domestic rice prices, and exchange rate instability will have been converted to domestic rice price instability.

So, what is the best strategy to deal with future instability in domestic rice prices? The answer depends on many factors, including the evolution of the world rice market, the likely sources of potential future instability, and the evolution of domestic economies.

SLIDE 10: REAL WORLD RICE PRICES (DAWE)

It appears that real world rice prices at present -- which are usually measured using a Bangkok standard -- are near an all-time low of perhaps US$246 a ton in constant 1998 prices. Thus, current world prices of about US$225/ton appear to be a bit low, and it is not inconceivable that prices will return to their average level during the past six years of US$290/ton.

The trends in the level and stability of Asian rice production go a long way toward explaining these trends in world rice prices. For example, the plunge in world prices from 1982-1984 coincided with a sharp increase in per capita rice production in Asia. During those three years, per capita production reached a new level of roughly 160 kilograms of paddy and this level has been approximately maintained ever since.

The proximate cause of the price decline was the achievement of rice self-sufficiency by Indonesia in 1984, which in the decade prior to that was by far the world’s largest rice importer. From 1981-1984, rice production in Indonesia increased 16 per cent in a span of just three years, and Indonesia’s abrupt exit from the world rice market undoubtedly had both real and psychological effects on world prices.

SLIDE 11: RICE AREA HARVESTED, 1961-96

However, rice production surged in many other countries at this same time, and it was the combined growth in many countries that allowed world prices to stay at this new low level for the next 15 years, even when Indonesia returned to the world market in the 1990s.

Future Sources of Rice Price Instability and Policy Options

So what does the future hold for the world rice market? Based on its evolution during the past 50 years, it seems likely that world prices will generally remain stable in the near future, just as they have during the past fifteen years.

The improvement in stability has come about due to the greater importance of irrigation in rice production, the improved pest and disease resistance of modern varieties, and the re-emergence and strengthening of the commercial orientation of major rice exporting nations. None of these trends are likely to be reversed.

Although the growth of irrigation is slowing in Asia, the share of irrigated land in total rice area is still increasing -- albeit slowly. Plant breeders continue to improve the insect and disease resistance of modern varieties, and biotechnology holds out hope for even more improvements in this area.

Finally, as the world economy moves toward freer trade and increasing integration, it is unlikely that Thailand and Vietnam will turn their back on the world rice market. And with some luck, Myanmar and Cambodia may emerge to become important players once again sometime in the next decade.

In addition to these trends, the effect of any given level of rice price instability is much less today than it was 30 years ago. Research shows that rice has a much smaller effect on the macro-economy today than it did before. In addition, with the massive reductions in poverty in north and south east Asia during the last 30 years, many citizens of these regions now spend a much smaller share of their budget on rice.

SLIDE 12: POVERTY IN DEVELOPING ECONOMIES IN 1993

However, this is not to say that the effects of instability are now negligible. There are still many poor Asians, especially in south Asia, for whom price fluctuations could cause serious problems. As a result there could still be political repercussions from any price instability in these areas. And, while the world rice market is likely to be relatively quiet in the future, increased financial market liberalization means that exchange rate instability could be a bigger problem in the future.

Under free trade, instability in exchange rates translates to instability in domestic rice prices just as much as instability in world rice prices. So how can we best deal with this instability especially where it matters such as the countries of south Asia and Indonesia?

Solutions

First, it is important to remember that the magnitude of the instability problem is less severe than it was 30 years ago, primarily due to the structural transformation of many Asian or rice producing economies. This means that today’s solutions will have lower costs, because the benefits from stabilization while still positive, are now lower.

SLIDE 13: BANGLADESHI RICE FARMER

"Tariffs maybe one way to help protect poor rice farmers from international price instability."

Second, assume for the sake of argument that there will be a tariff on rice, despite the sensitive, if not controversial nature, of such a move. While the primary effect of a tariff is to raise the average level of prices, a tariff also provides stabilization for farmers -- but not, it should be noted, for consumers.

For example, imagine that domestic rice prices are equal to world prices, given the exchange rate current at the time. If there is a tariff of 20 per cent, world prices can decline by 20 per cent, and there will be no effect on farmers whatsoever, since it will not be profitable for traders to import at those prices -- the tariff would also protect farmers from an equivalent appreciation of the exchange rate.

In the absence of this tariff, domestic prices would have followed world prices and declined by 20 per cent. Thus, a tariff may provide farmers some shelter from downward price movements on world markets.

However, large upward movements in domestic rice prices that adversely affect consumers can occur due to a large upward price spike on world rice markets, a large depreciation of an exchange rate, or a large shortfall in domestic production.

SLIDE 14: PIC OF FLOODED RICE FIELDS

"One likely problem is a short fall in domestic production caused by another El Nino or La Nina weather-related problem."

Given the earlier arguments about the world rice market, the first scenario is relatively unlikely. Yet the latter two events -- exchange rate depreciation or domestic shortfall -- are real possibilities. Perhaps the most likely problem is a shortfall in domestic production due to another El Nino or La Nina weather-related problem. In such cases, price stability is best assured by allowing the private sector to step in with commercial imports.

However, consumers could not be completely protected by a low tariff alone. There is always some lag between the contracting of imports and their arrival at port, and a modest level of domestic food security stocks -- perhaps half a million tons -- held by the government would provide help in this situation.

Finally, consumers can also be affected by a depreciation of the exchange rate, which puts upward pressure on domestic prices. This only poses a problem if the spike is very large, however. Small deprecations of the exchange rate -- in the order of 25 to 30 per cent -- are probably not sufficient to encourage large exports of rice even if domestic prices fall below the equivalent world price because of quality problems.

To summarize, the world rice market will probably be relatively stable in the near to medium term. Some countries will still need to be concerned with rice price instability, but it is not as important an issue as it was in the past and it will be necessary to pursue new low cost solutions. A set of policies that could perhaps fulfill this requirement would consist of a moderate tariff, food security stocks, and the possibility of an emergency export ban in very unusual circumstances.

 

However, we need to always be careful not to underestimate any future potential problems when it comes to rice. The world's two biggest nations -- China and India -- depend on rice almost completely for their food security and while China has managed to slow its population growth, India is still struggling to do so.

More importantly the rice industry still faces the basic problems of growing demand against the possibility of shrinking supplies which is sure to put upward pressure on prices as the international market continues to open up. Admittedly, in some countries, price increases may not be a problem and could be a blessing.

However, for tens of millions of people -- especially in south Asia -- any increase in the cost of rice would only make their daily struggle for food that much harder. For them, rice always deserves special attention and so it should get special attention from us as well.

Thank you.

 
 

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