Rice prices set to remain 'firm' until third quarter

Soaring rice prices are expected to remain high despite the start of the harvest this month and predictions by the United Nations' Food and Agriculture Organisation (FAO) that this year's output would increase by 2.3 per cent, reaching 666 million tonnes.

Fears of shortages after Cyclone Nargis hit rice fields in Myanmar and other parts of Asia have fuelled speculation of further price rises.

The benchmark price of rice exported from Thailand, the world's biggest supplier, crossed the $1,000 per metric tonne mark for the first time this week as importers rushed to secure supplies, heightening concern about a global food crisis.

And the price of 100 per cent grade B white rice increased 8.4 per cent to $1,020 per metric tonne – triple the price at the beginning of the year. However, in Chicago, rice fell to below $22 (Dh80.7) per 100 lb this week after prices rose above $25 last month.

Analysts pointed to several factors for the continued upward price trend, including fear of a global food crisis, curbs on exports, the weak dollar, inflation and increasing political interest in bio-fuels.

As a result, rice prices are expected to remain firm at least until the third quarter of 2008, unless the grain shows a real rise in output and restrictions on exports are eased in the coming months. At the moment, only Thailand, Pakistan and the United States are exporting rice without constraints.

Decisions by some countries to curb rice exports has led to speculation world rice trade will drop about seven per cent to 28.8 million tonnes this year.

The FAO said world rice stocks would stand at 105.2 million tonnes at the close of 2008 marketing seasons, slightly below levels in 2007, and the lowest level since the early 1970s. Meanwhile, rice consumption is expected to rise two per cent to 437 million tonnes in milled terms in 2008, with 379 million tonnes to be consumed as food.

However, analysts said even if the weather is favourable in the coming months and export restrictions are lifted, prices are unlikely to return to 2007 levels as production costs have surged on the back of rising fuel, fertiliser and pesticide prices. They predict rice prices would start to calm next month as fresh crops hit markets, but they will not return to 2007 levels anytime soon due to soaring production costs and rising demand.

And a long-term demand-supply imbalance is clearly indicated by the depletion of stock that has been going on for several years.

Yaser Rawashdeh, a sales trader at Saxo Bank, told Emirates Business food prices will continue to be higher than in the past and the days of cheap food are gone.

"Look at the changing dietary habits in major demographic areas such as China and India," he said.

"There is an expanding middle-class population and this will increase the demand on food staples. In fact, current food prices are higher than their real value. But with the increasing demand and other factors such as bad harvest, 2007 food prices will double this year."

Rawashdeh also addressed increasing political interest and support for bio-fuel ethanol. "There should be political intervention to stop the increasing dependence on ethanol and other agricultural fuels because they raise food prices."

Sherif Sanad, head of marketing at London-based One Financial, said the global rice crisis has become a major concern in recent months – a problem exacerbated by the catastrophic cyclone that struck Myanmar last week. "We see supply is going to remain tight for the foreseeable future due to the dual effect of countries entering the market to replenish stockpiles depleted by natural catastrophes and other countries holding on to their stockpiles to feed their own people. Prices will also find support as Pakistan, the United States and Thailand cut their inventories and Vietnam, India and Egypt curb shipments to guarantee local supplies.

"Myanmar may be forced to abandon exports and seek supplies from the international market. It may import 30,000 tonnes this year, according to an estimate from the US Department of Agriculture," he said. Sanad said short- and long-term factors have contributed to the rice crisis. "The most obvious is an imbalance of supply and demand as populations boom and people consume more food. More land is being used to graze livestock and to grow cereals and other crops. This imbalance has been somewhat disguised by a reduction in rice stockpiles, which are currently at their lowest since 1988," he said. "It is a global phenomenon that when populations become more affluent, they tend to eat more meat products. This in turn puts pressure on land as livestock takes more of the land for grazing."

Another factor is slowing yield growth, which has fallen substantially over the past decade in most countries. A reduction in government spending on research and development is another key issue. In the 1990s, governments began taking low prices for granted and reduced agricultural research and development budgets.

Meanwhile, the steady climb of food prices has sparked interest in commodities, said Sanad. "One Financial has seen a surge in interest in soft commodities during 2008 as traders seek to benefit from the seemingly unending bull market in grains, rice and other food stuffs.

"Traders have read in the press about sky high commodity prices and they want to get in on the action. With demand from emerging markets booming and the US and Europe likely to experience only a short downturn, we cannot pick the top of the commodities bull market," he said.

Taking its toll

Gulf Arab countries rely heavily on food imports, leaving them vulnerable to price changes on international markets. The Emirates Society for Consumer Protection has urged the government to subsidise basic food items as part of measures to curb food price rises, which it expects to increase by 40 per cent this year.

But food price inflation in the UAE – the second-largest Arab economy – is partly driven by the dirham's link to the dollar, which recently hit record lows against euro and other major currencies.

The UAE buys about 750,000 tonnes of rice annually, mainly from India, Pakistan and Egypt, but also large amounts from Southeast Asia. Traders said the UAE will continue to face a shortfall in supplies until at least August, when consumer and producer nations replenish stocks and expect extra crops to boost supplies.

"I would not be surprised if by the end of this year we double or treble our imports, if we can, to cover the shortage in the market," an Abu Dhabi-based rice importer said. Rice shortages in the UAE have driven some smaller groceries to stop selling South Indian rice varieties.

Grocery store owner Abdul Haneef said: "The price of a kilogramme of matta rice [boiled Indian rice] has gone up by Dh1.50 from Dh4 to Dh5.50 per kilogramme. Now, we are not selling matta rice and are turning back our customers. The regular suppliers cannot sell us the same quantity they used to when there was no shortage."

Even supermarket chains have imposed restrictions on rice sales to individuals to prevent smaller businesses from attempting to buy out their stock.

Chains have also agreed, under pressure from the UAE Ministry of Economy, not to increase the price for basic foodstuffs, like rice.

A sales manager at a leading local chain, who spoke on condition of anonymity, said: "If we do not have restriction [on the amount customers could purchase], restaurant and cafeteria owners would come and purchase the entire stock at the discounted price leaving our normal customers without rice. We do not want our regular customers to face the impact of rice shortage."

The rising price of staples such as rice – dubbed a "silent tsunami" by the World Food Programme – has sparked violent protests from Haiti to Somalia, and heightened fears that the world's poor may soon struggle to feed themselves.

(VM Sathish, with input from Reuters)

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