Rice price slump: Economics & long-term solutions

Prices would never be so volatile & plunge suddenly if farmers, traders & exporters had better info, futures markets & supply projections.

AGRICULTURE & ECONOMICS

Rice price slump: Economics & long-term solutions

6/11/2016
Veera Prateepchaikul & Post Reporters

Speculation among rice traders and exporters is mainly to blame for tumbling rice prices during this harvest season, according to a senior researcher of Thailand Development Research Institute (TDRI).

If traders and exporters had access to a reliable database of the country's actual rice stock and more accurate projections of the seasonal supply to come, the prices would never have been this volatile.

This is according to TDRI distinguished fellow Nipon Poapongsakorn.  Mr Nipon made the conclusion in a research article called "Why Hom Mali rice prices have fallen sharply? Who are scapegoats?"

Long-term solutions to rice price volatility, as experienced recently, will thus hinge on making rice prices and the factors behind rice prices public knowledge.

Setting up better market mechanisms that take advantage of this information and empowering poorer rice farmers (smallholders) with access to these markets and market knowledge will be part of this. 

MORE RAIN, MORE RICE, LOWER PRICES 

The main factor that caused the rice supply to surge this year was the high level of rain in the Northeast, which had brought a higher yield of per rai.

The rice from previous harvests remained at a high volume in major rice millers' warehouses as many rice traders earlier this year had expected the rice price would surge due to the effect of El Nino weather.

The reason the future price quotes for Hom Mali rice had plunged was that most traders and exporters had expected the rice supply would increase exponentially after the new harvest, while the demand would remain the same or even shrink when compared to that of last year.

When supply of a good increases, price falls, all other things remaining equal according to the law of supply and demand in basic economics (see here).

He said the traders had expected the rice prices in December to fall well below the future price quotes for rice in October.

The higher than usual supply of Hom Mali rice this year was also to blame for the low rice prices, he said.

MORE ON THE RESEARCH REPORT

Veteran Bangkok Post columnist and former editor Veera Prateepchaikul provides some more important insights into Dr. Nipon's report.

Dr. Nipon admits there might be collusion going on to suppress the rice price, but it was not the real cause.

He also criticised the way the government sent military personnel and officials to check warehouses of rice millers suspected of involvement in price collusion as unreasonable.

PANIC SPECULATION AS CAUSE OF PRICE SLUMP

He blamed panic price speculation by exporters as the actual cause of the sudden price slump in rice.

He said some exporters had clinched forward rice deals with overseas customers by setting the future price at US$548 (19,190 baht) per tonne for the first lot of rice to be delivered in December from the November crop, while the spot price then was $720.

Although the future price is not public knowledge, it is known among exporters, who then panicked and started making forward rice deals (rice futures contracts) with their customers, driving the domestic price of rice down even further.

Mr Nipon said price speculation among exporters and millers is a normal part of the market mechanism.

Speculation can get spiral out of control, if there is a lack of reliable information.

He suggested the creation of a rice futures market and a reliable system of forecasting rice production to overcome these problems.

FARMERS NEED TO BE PART OF THE PROCESS TO END FARMER POVERTY

Mr Nipon's explanation about the actual cause of the rice price slump is further evidence that farmers have absolutely no say in dictating the price of rice.

That is why they have always been at the wrong end of the rice trade and why they are always poor, while most millers and exporters just get richer and richer.

Yes, there are some rich farmers, but they are landlords who lease their farmland to the landless.

It is far too easy for farmers to suddenly become landless farmers when prices suddenly plunge as they have recently and they are forced to sell their land to pay off debts (see here).

THE DETAILS

Mr Nipon said since September, the price of unmilled Hom Mali rice unprecedentedly decreased by 13% from 12,090 baht per tonne to 10,500 baht in late October, which is the lowest price in nine years, compared to only 2% decrease of the price between June and September.

The plunge in paddy rice prices was driven by the future price quoted for milled Hom Mali rice for December that had dropped to US$548 (about 19,200 baht) per tonne. That figure, quoted on Oct 28, came as the spot price stood at US$720 per tonne.

As a result of the sharp drop, the price of new-crop milled Hom Mali rice in November, the first month of the current harvest, had dropped to 1,330 baht per picul (about 22,171 baht per tonne) compared to 1,750 baht per picul (29,172 baht per tonne) in the same period of last year (Picul is a unit of weight used in China, Japan and Southeast Asia that is fractionally heavier than 60 kilogrammes).

http://www.bangkokpost.com/news/general/1128197/speculation-blamed-for-the-slump-in-rice-price

http://www.bangkokpost.com/opinion/opinion/1128781/band-aid-solutions-hide-real-rice-problems

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