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PART II - RICE IN WORLD TRADE


Status of the world rice market in 2002 - C. Calpe

Senior Commodity Specialist, Basic Foodstuffs Service, FAO, Rome, Italy

GENERAL CHARACTERISTICS

Rice is a major food staple and a mainstay for the rural population and their food security. It is mainly cultivated by small farmers in holdings of less than 1 ha. Rice is also a “wage” commodity for workers in the cash crop or non-agricultural sectors. This duality has given rise to conflicting policy objectives, with policy-makers intervening to save farmers when prices drop, or to defend consumer purchasing power when there are sudden price increases.

Rice is vital for the nutrition of much of the population in Asia, as well as in Latin America and the Caribbean and in Africa; it is central to the food security of over half the world population, not to mention to the culture of many communities. Rice is therefore considered a “strategic” commodity in many countries and is, consequently, subject to a wide range of government controls and interventions.

PATTERN OF PRODUCTION AND TRADE

During the 1990s, global rice production expanded at a rate of 1.8 percent per year - marginally above the population growth rate. By the end of the decade, it reached 400 million tonnes (Mt) in milled equivalent (Figure 1). Developing countries account for 95 percent of the total, with China and India alone responsible for over half of the world output (Figure 2). Most of the increase in the 1990s was sustained through productivity gains rather than land expansion. In recent years the tendency for yield growth to slacken has been cause for concern. Furthermore, competition for basic resources (in particular, land and water) from other agricultural and non-agricultural sectors, as well as the negative environmental impacts associated with rice cultivation, are expected to pose a serious challenge to the future development of the sector.

During the 1990s, global trade in rice expanded on average by 7 percent a year to about 25 Mt (Figure 3). Despite such dynamic growth, the international rice market remains thin, accounting for only 5 to 6 percent of global output. Unlike for other bulk commodities, the international rice market is segmented into a large number of varieties and qualities, which are not easily interchangeable because of strong consumer preferences. Ordinary indica rices are the most commercialized (some 80 percent of international trade by the end of the 1990s) followed by aromatic (Basmati and fragrant) rices at 10 percent, medium rices at 9 percent and glutinous rices at 1 percent.

ECONOMIC, MARKET AND INSTITUTIONAL INTEGRATION

Developing countries are the main players in the world rice trade, accounting for 83 percent of exports and 85 percent of imports. The concentration is particularly high on the export side, since five countries (Thailand, Viet Nam, China, the United States and India) cover about three-quarters of world trade (Figure 4). This situation is in contrast to the fragmentation of import markets and the wide year-to-year fluctuations in individual countries’ purchases, resulting from the fact that importers do not rely consistently on the international market for rice supplies, but only as a last resort to fill the gap caused by a production shortfall. Unlike for other important cereals, there is no major international future market for rice.

During the 1990s, Brazil, Indonesia, Saudi Arabia, Iraq and the Islamic Republic of Iran were the major destinations in the rice trade (Figure 5). In the last few years, however, following a shift in policies, imports by African countries have surged, providing a major stimulus to trade.

FIGURE 1
Global rice production and consumption

Note: Figure for 2000 is an estimate.

FIGURE 2
Major rice producers, 1998-2000

FIGURE 3
Global rice trade volume and share in global production

FIGURE 4
Major rice exporters and export shares, 1998-2000

FIGURE 5
Major rice importers and import shares 1998-2000

FIGURE 6
FAO export price index for rice

Because of rice’s importance for food security and political stability, a significant proportion of trade is conducted by state trading enterprises, some of which are also obliged to procure or distribute rice domestically. This applies to both importing and exporting countries. However, in recent years, many of these state enterprises have lost their monopoly position and private traders have taken on greater responsibility for dealing with rice imports and exports.

Government-to-government transactions, which used to account for about half of world trade in the 1970s, are now estimated to represent less than 10 percent of the total. In the past few years, however, they have regained popularity, as low international prices have incited or compelled governments to play a more active role in trade, either to gain bargaining power or as an indirect means of sustaining producer prices. These transactions often take place under conditions that can barely be matched by private traders, especially as far as credit is concerned.

GENERAL THRUST OF RICE GOVERNMENT POLICIES

Government support to producers in developing countries concentrates mainly on: research in improved or hybrid rice varieties, investments in irrigation, preferential credits, extension and distribution of improved seed. Intervention to influence prices is also common - through procurement purchases or releases from stocks, or through changes in trade policies. In developed countries, much assistance to the sector is conveyed through direct payments and through price support.

Government often plays an important role in the first phase of the marketing cycle, by procuring paddy at minimum producer prices.

In general, the involvement of the public sector in paddy processing and rice distribution is more limited. However, some governments oblige millers to purchase paddy at a predetermined price and to charge fixed mark-ups at each stage of the marketing process, while others distribute rice at fixed retail prices. It is common practice to manage rice stocks or to adopt trade policy measures in order to stabilize domestic market prices.

Trade measures, especially tariffs, are widely used to protect domestic rice markets. Despite the relatively high WTO (World Trade Organization)-bound tariffs, rice imports are often subject to “Special Safeguards” in country schedules. The role of state companies in managing international rice flows is also important, although such companies do not usually have monopoly privileges and they share their trade functions with the private sector. Many commercial transactions are conducted through government-to-government deals, the terms of which are not usually released to the market, contributing to poor transparency. Restrictions on exports of paddy or husked rice are very common, reflecting an endeavour to promote domestic rice processing.

Because of the importance of rice as a staple food, many governments maintain minimum food reserves to ensure food security. In addition, countries engaged in rice distribution schemes and producer price support usually keep large rice inventories in public storage facilities.

Since rice is one of the most protected traded commodities, there is considerable scope for further market liberalization. However, because of its importance in terms of food security, income generation and political stability, governments may be reluctant to loosen their control over the sector. Moreover, rice is central to the concepts of food security and multifunctionality - as promoted by a number of countries for consideration in the Doha new round of multilateral trade negotiations (launched in November 2001).

CURRENT ISSUES AND PROBLEMS

Falling international prices have been the principal cause for concern in the last few years, for both importing and exporting countries. The slide in world quotations was a reflection of the dynamic growth in global production since the mid-1990s, following the implementation of expansionary policies in a large number of countries. Although world paddy production has fallen in the past 2 years, supply releases from stocks have kept the downward pressure on prices (Figure 6).

Although genetically modified rice varieties have been developed (to enhance nutritious characteristics, e.g. “Golden Rice”, or for adaptation to extreme growing conditions, e.g. varieties tolerant to salty water), the issue of their acceptability worldwide has not yet gained prominence, because rices produced from such varieties are not yet widely traded. More importantly, concerns have arisen regarding the use of the “Basmati” rice denomination and claims of biopiracy on fragrant rice genes.

Rice production sites are often the natural habitat for a wide variety of birds and plants. Water management in ricelands also ensures a soil desalination process essential to the maintenance of land fertility. As a result, environmental concerns frequently come to the fore in defence of the sector, especially in developed countries.

REVIEW OF RICE POLICIES FROM AWTO PERSPECTIVE

Market access

Bound tariffs

Bound tariff rates for rice are generally high, often over 100 percent. Some countries (India, the Dominican Republic and Panama) recently renegotiated tariff bindings to higher than the originally agreed levels, alleging that the latter provided insufficient protection for their domestic sectors. Japan, the Republic of Korea, the Philippines and, more recently, Taiwan Province of China have invoked deferred tariffication under the “Special Treatment” provisions of Annex 5 of the Agreement on Agriculture. From the point of view of an international rice exporter, deferred tariffication is favourable, because it is associated with the opening of a larger preferential tariff quota (8 percent of base-period consumption at the end of the implementation period, instead of 5 percent for developed and 4 percent for developing countries).

Applied tariffs

Applied tariff rates are often set equal to bound tariffs when international prices are low. However, their level tends to change frequently, depending on the domestic and international market situations, contributing a high level of uncertainty to the world rice economy. Moreover, variable import duties (e.g. price band mechanisms) are popular in some countries in Central America and the Caribbean and in South America.

Tariff escalation

Tariff escalation is less important for rice than for other commodities, because of the relatively small volume of trade of paddy or unhusked rice. Nonetheless it should be noted that tariffs increase according to the processing stage and are much lower for paddy or husked rice than for milled rice.

Special Safeguards (SSG)

Several countries[5] have reserved the right to use the Special Safeguard (SSG) provisions; however, only rarely have they been invoked for rice.

Tariff rate quotas

Eleven countries[6] have made commitments to grant minimum access through preferential tariff rate quotas (TRQ) under the 1994 Uruguay Round Agreement (URA). Mainland China and Taiwan Province of China upon accession in 2002 also agreed to the opening of a preferential tariff rate quota. These quotas are sometimes subject to high tariffs (e.g. 80% in Colombia, 90% in Indonesia and 177% in Morocco) and preferential tariff quotas often constitute the only means for accessing important markets (EC, Japan, Republic of Korea, Taiwan Province of China etc.) where out-of-quota imports are subject to prohibitive tariff rates. In the case of mainland China, the initial import quota agreed is high (almost 4 Mt in 2002), with the in-quota tariff set at just 1 percent.

The problem of underfill of TRQs exists, especially for highly competitive, traditional exporting countries, such as Thailand. More recently, mainland China failed to import sizeable volumes of rice under its preferential access scheme - mainly a reflection of the low domestic rice prices compared to world quotations, partly induced by the release of large quantities of rice from government inventories. The administration of TRQs is often entrusted to state trading enterprises or other government agencies. There are a variety of methods for allocating the quotas to external suppliers: on the basis of tenders in Japan and the Republic of Korea; on a first-come, first-served basis in the Philippines; or on the basis of historical performance in the EC. The systems in place for allocating TRQs among different exporting countries do not appear to have caused substantial problems.

Non-tariff barriers

Phytosanitary barriers are less important for rice than for other commodities. Certain restrictions on rice imports from Viet Nam and Thailand are in force in several Latin American and Caribbean countries on phytosanitary grounds, influencing the pattern of trade flows into the region.

State trading is a characteristic feature of the world rice economy, since a large number of exporting and importing countries rely on government trade agencies to sell or purchase rice on the international market. These bodies may hold a trade monopoly on rice exports or imports (as is the case in the Philippines, Malaysia and China), or they may make rice transactions alongside private traders (Indonesia, Thailand, Viet Nam and Myanmar). Dealings through public agencies are not usually made openly and the quantities, prices and other conditions of the exchange are often kept secret. Lack of transparency is therefore often associated with state trading. However, lack of transparency also characterizes trading by producer associations; for example, the rice export association in Australia does not even reveal the destination of exports. State trading or direct government-to-government transactions are most prevalent in Asia, particularly among Near East countries, but also in Bangladesh, China, Indonesia, the Philippines, Malaysia, Myanmar, Thailand and Viet Nam. It is not common in Latin America, although some governments do play an important role in rice trade using licensing and import permits rather than direct state trading.

Export measures

Export subsidies

Export subsidy reduction commitments have been made under the Uruguay Round Agreement on Agriculture (URAA) by Colombia, Indonesia, Uruguay, the EC and the United States. The actual use of export subsidies has fallen short of the aggregate ceiling, although information is difficult to get even from the WTO. Proposals for further reduction commitments are likely to meet opposition from the EC. Other issues have arisen in relation to export competition in rice, in particular the granting of export credits by the United States of America. It should be noted, however, that export credits are also commonly used in government-to-government deals, although there is little information available in connection with such practices.[7]

Export subsidies have been used by India since mid-2001 to promote exports of rice held by the government Food Corporation of India. According to the WTO, India is not eligible to use export subsidies on rice, but the country claims that under the URAA (Article 9-4) the country is exempt from commitments on export subsidies for marketing, processing and transportation. While this position is questionable, the country has to date not been challenged on that account by other countries in the WTO.

Export restrictions

Restrictions on the export of paddy and unhusked rice are also applied by a large number of exporting countries as a way of protecting the milling industry. This strategy reduces the flexibility of importing countries trying to promote value-adding processing industries by importing non-milled rice.

Domestic support

Amber box domestic support

Developed countries completed their Aggregate Measurement of Support (AMS) reduction commitments in 2000, mainly through cuts in price support. Such cuts have been associated with a rise in compensatory payments to rice producers (classified under either the “blue” or the “green” box), which have been particularly important in the EC, Japan and the United States of America. The shift from price to income aids has not been accompanied by a major fall in production and some developed countries now find themselves with large rice stocks. Support to the rice sector accounts for a very high proportion of the total AMS in Japan and the Republic of Korea. These countries are expected to resist proposals for a reclassification of policies (e.g. from the green or blue box to the amber box). They are also likely to oppose further reductions in the AMS on the grounds of concern for national food security and preservation of the countryside, from an environmental, cultural and social perspective.

Few developing countries have submitted a base AMS, and few are therefore subject to reduction commitments. Most developing countries still have ample scope for increasing their assistance to the sector - should they choose to do so - under the “de minimis” provision. Only very sizeable reductions in the de minimis ceilings could negatively affect rice producers in those countries where the crop accounts for an important share of total agricultural outlays, i.e. many Asian countries and several Latin American and Caribbean countries. The proposal to raise the de minimis via special and differential treatment for least developed countries may have little effect, since 10 percent of the base production value already granted gives ample scope for domestic support to the commodity.

The impact of inflation and changes in exchange rates on current AMS may be of far greater importance for countries which submitted a base AMS in domestic currencies and where inflation is high.

Blue box domestic support

Decoupled, production-limiting payments are made to rice producers in the EC, Japan, the Republic of Korea and Mexico. Since 1999, they have been essential for allowing producers to weather the impact of low prices. They have been strongly criticized by other players in the rice market for not being truly “decoupled”, and demands are made for their elimination or reduction by shifting decoupled income support and income safety nets from the blue or green boxes to the amber box, in order to make them subject to reduction commitments.

Green box domestic support

In the United States of America, considerable resources have been channelled to the sector through production flexibility contracts, retirement payments and payments for natural disasters, all of which are classified as green box measures. Since 2002, the new Farm Bill has endogenized the counter-cyclical and emergency payments which had been previously been provided through the 1996 US Farm Bill (FAIR ACT) on an ad hoc basis; they are classified as green box measures. There is a prevailing tendency generally to promote non-commodity specific programmes, such as producer insurance schemes, also in developing countries.

A number of developing countries support the inclusion of a “Food Security” box which would permit the exemption of certain policies from reductions commitments. This would contain, inter alia, poverty alleviation measures and product-specific support for low-income farmers. It would be of very high relevance to rice production in a large number of countries, especially India.

Other issues

The “multifunctionality” of agriculture in terms of environmental, social and cultural concerns is being used to defend the permanence of blue and green box payments. In Japan, most of the emphasis on multifunctionality and food security is in relation to rice. In developed countries where rice is a non-marginal crop, the elimination of blue or green box support would considerably impair the sector.

Rice production sites are often the natural habitat of a wide variety of birds and plants. Water management in ricelands ensures that the soil desalination process essential to the maintenance of land fertility takes place. Environmental concerns are consequently a frequently used weapon in defence of the sector.

Food safety is not particularly relevant to rice, although there is increasing concern regarding GMOs (genetically modified organisms). While some rice varieties are being developed with new genes (e.g. carotene-enriched rice), they are not yet traded internationally.

An emerging issue which is of importance to the WTO is that of intellectual property rights over particular varieties of rice, in particular in relation to the Basmati and fragrant rice varieties developed in the United States of America. “Biopiracy” of the genes is suspected and it is feared that the new strains could compete with traditional Basmati and fragrant rice exports from India, Pakistan and Thailand.

There have also been issues regarding the use of certain denominations, such as “Basmati” or “Jasmine”. India and Pakistan are now trying to have the name associated with the geographical zone of production.


[5] Costa Rica, between April and June 1999.
[6] Colombia, Costa Rica, Hungary, Indonesia, Japan, Republic of Korea, Morocco, the Philippines, Poland, Thailand and Venezuela.
[7] For example, Viet Nam was reported in August 2001 to have sold rice to Indonesia with payment deferred by 720 days.

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