Although not as popular in the West, rice is the single most important
staple food for a majority of the world's population. The cereal grain
accounts for nearly a fifth of total calories consumed by the entire
human species. That fact alone should discourage folks from meddling
with production, free trade and availability of rice. But governments
still try it and, nearly always, find themselves on the wrong end of
This year's chief rice manipulator has been Thailand,
the world's top rice exporter. Following her late-2011 election, Thai
Prime Minister Yingluck Shinawatra initiated a multi-billion dollar
subsidy with the aim of pumping money into the country's rural
heartland. Shinawatra's plan (which helped propel her into office) was
predicated on the idea the government could buy rice (specifically
unmilled rice, also called "paddy") from rural farmers at double the
market rate, stockpile the excess over a certain level and then re-sell
it on world markets after prices rose for a tidy profit.
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In essence, she hoped to manipulate global rice prices to her country's
benefit—and of course, gain the support of the rural electorate come
the next election. (We're not much fans of this plan, though we suppose
it's better than the idea she floated to form an OPEC-like rice cartel
of Southeast Asian producers to control supply worldwide.)
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So far, Thailand's spent nearly $8 billion buying rice from its
farmers. And Tuesday, Shinawatra's government approved plans to spend
another $7.8 billion—2% of Thailand's total economic output—to buy
additional rice from upcoming harvests. However, Shinawatra (and other
proponents of the plan) failed to account for the importance of
incentives. Specifically, incentive for other rice producers.
As Thailand began buying up its own rice and controlling exports to
other countries, rice prices spiked. (It should be noted, droughts in
the US and Brazil, among other factors, have also played a large part in
the price increases.) Demand for rice is fairly inelastic—dietary
staple that it is. So other countries in the region balked at the higher
prices and boosted their own production—both for international trade
and for domestic consumption. India, for example, loosened its stringent
controls on exports of non-basmati variety rice. (See here for an interesting story on how Indian rice export controls roiled the global rice market in 2007.) Vietnam
invested heavily in increasing production of higher quality rice to
supplant lost Thai exports and has found ample willing buyers. The
country may overtake Thailand as the world's leading exporter of rice as
early as next year.
That's left Thailand in a precarious position with a large stockpile of
rice few foreign buyers are willing to purchase. It's estimated that to
even recoup the costs of its program, Thailand would have to sell its
stockpiled rice at $800 a ton—today's market price for Indian
non-basmati rice runs a mere ~$400 a ton. Add to Thailand's tab another
$7.8 billion in government rice purchases, processing and stockpiling
costs, and Thailand's break-even price on the whole experiment goes up.
Of course, Thailand may yet break even. There's no telling what supply
pressures may appear—drought, natural disasters, plague or fungus that
destroys rice crops. But our guess is that's a long shot. Or perhaps a
group of Thai academics succeed in the constitutional court challenge of Shinawatra's rice scheme and the whole plan is unraveled
at a still not small cost to Thailand—one can hope. All this just goes
to show, even the best-intentioned, government-laid plans of rice and
men often go awry.
The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
source: Market Minder
This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients.
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