Source: World Bank, Jakarta.

The world is still a long way from a repeat of the devastating food commodity price inflation that it experienced in 2008.

Nonetheless, prices have once again been moving upwards. The international prices for most agricultural commodities have risen sharply since mid-2010.

The international price of rice so far has remained more stable and analysts expect a comfortable supply-demand balance through the first quarter due to ample supplies from Thailand and Vietnam and expected reduced demand from the Philippines.

Still, food security concerns might contribute to a spike in rice prices. Such concerns have driven India to continue its curbs on rice exports and Bangladesh to pay higher prices for import rice.

Once again, this raises the specter of a surge in the price of rice and the possibility that, if left unchecked, such a surge could trigger a poverty crisis given the huge number of people in East Asia who spend a large proportion of their income on this one commodity.

This is obviously of great relevance to Indonesia with regard to the vulnerability of its own poor and near-poor populations.  

In a study recently published by the World Bank in Indonesia, many lessons can be learned from the dramatic previous increase in the international rice price, which tripled in less than four months in 2008.

Such research is vitally important, as policymakers — not only in Indonesia but also in other Asian countries with populations vulnerable to rice price increases — need to understand the factors driving the increase and formulate policies to facilitate the pricking of future price bubbles.

Back in 2008, many observers attempted to explain the price surge in terms of factors that were widely recognized as driving a similar surge in the global price of wheat.

In particular, they attributed the hike to the weakness of the US dollar, increased energy prices
and an increased demand for biofuels.

Other observers tried to explain the increase in terms of production shortfalls due to crop failures
and increased demand, with some also pointing towards financial speculation in the agricultural futures market as a potential culprit.

World Bank researchers looked in detail at all of these claims and also analyzed the specific characteristics of the rice market to try to identify the key driver behind the 2008 surge in the rice price.

The bank’s research showed that international rice markets were “thin” — less than 5 percent of global rice production was traded internationally — and, therefore, rice prices are vulnerable to very small changes in supply and demand.

Furthermore, the vast majority of rice produced for export comes from only three countries: Thailand, India and Vietnam.

Meanwhile, the impact of higher domestic rice prices on households places governments in Asia under heavy political pressure to control rice prices in order to protect their electorates. This makes the issue of rice prices an extremely sensitive political issue.

The most important finding of the World Bank’s research, however, was that none of the factors cited by observers in 2008 was the primary reason for the huge surge in international rice prices.

According to the World Bank, sudden changes in the trade policies of the major rice-exporting countries, together with the urgent efforts of some rice-importing countries to secure supplies at
almost any price, led to hoarding and speculation.

The “thinness” of the global rice market also made it particularly vulnerable to such short-sighted trade policies.

Indeed, restrictions on rice exports had the opposite of the intended effect on the local markets of those countries implementing the measures: On the back of panic buying and hoarding, prices rose dramatically in India and Vietnam.

While each country implemented measures to safeguard domestic food security that appeared to make logical sense, the impact of several countries implementing similar measures independently had the opposite of the intended effect.

That ultimate effect was to close down international rice trading and create a price bubble that had the potential to exacerbate poverty in Asian countries, where rice is a major consumable staple food.

In fact, the precipitous 2008 surge was eventually tamed with the announcement in early June of that year that Japan would release 300,000 tons of rice from its stockpile onto the world’s markets.

This public commitment played an important role in calming markets, and rice-market fundamentals almost immediately began to improve.

Shortly afterwards, Vietnam also lifted its export ban and, together with the resulting increased supply from Asian growers reacting to higher prices, demand for imports weakened significantly.

The good news that stems from this analysis is that in 2008 it would not have taken very much to
have avoided the rice crisis, and therefore this applies to potential rice price crises going forward.

Because the world rice market is so small, an increase in supply of as little as 1 million tons would have a major impact on prices.

Such vital increases in supplies during times of escalating rice prices could be achieved by a combination of the relaxation of rice export controls, particularly those by India, Vietnam and China, and the release of stockpiled rice by those with sizable stocks, currently Japan, China and Thailand.

In the longer term, policy responses need to be developed to facilitate the emergence of a healthier, and less restricted global rice market — one that is ultimately less “thin”.

First, one clear moral to be learned from this story is that no one country can solve a global rice crisis alone.

While the measures above would have served to avoid the 2008 rice crisis, longer-term responses to prevent such disturbing surges in the rice price in the future could include greater regional coordination to address sudden food price increases and reduce trade distortions, particularly within an ASEAN+3 framework.

Second, the development of more effective ways of dealing with public tenders and price stabilization would also help to alleviate the problem.

Third, the development of measures to improve agricultural productivity and reduce rice import tariffs would also help to make the rice market function more efficiently.


The writer is a senior economist at the World Bank office in Jakarta.

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