Major issues of concern for the world rice economy in the medium term: an economic perspective

C.L. Yap

Senior Commodity Specialist, Commodities and Trade Division, FAO

INTRODUCTION

The world rice market is going through a period of intense policy change and price instability. This, in turn, has caused hardship for farmers producing for export as well as for importers dependent on external sources for their supply of staple food. This paper reviews the medium- and longer-term outlook for the global rice economy and the main factors that have contributed to the recent instability in international rice prices and that are likely to affect the future situation. Finally, it examines some of the principal issues of concern for rice-producing and rice-consuming countries, and suggests policy measures to reduce these problems.

THE OUTLOOK FOR THE WORLD RICE ECONOMY

Rice is consumed mainly in developing countries. By 2010, milled rice consumption in these countries is projected to be 463 million tonnes while in developed countries it is expected to reach only 19 million tonnes. The projected global consumption of 482 million tonnes by the year 2010 compares with a present consumption level of just under 380 million tonnes. Hence, in the next 14 years, output of rice will have to be expanded by a total of 102 million tonnes in milled terms (nearly 30 percent) or 153 million tonnes of paddy. Within three years, global output of rice will have to increase by 22 million tonnes (milled) or 33 million tonnes (paddy) to meet the expected demand of 402 million tonnes in the year 2000. This increase will be sufficient to maintain rather than raise global per caput consumption. World per caput consumption is expected to change very little, gaining less than 1 kg in the ten years before 2000 compared with a 3.2 kg growth in the decade prior to 1990.

Table 1

Projected rice situation in 2010 (million tonnes, milled)

Most of the increase in output will have to come from developing countries which account for over 95 percent of the production. The bulk of the increase will have to be obtained by raising yields since little new land is available, but the huge rise in yields that was achieved in the past is not likely to be repeated.1 Average annual yields at the global level are projected to grow at 1.5 percent per annum between 1988-90 and 2010, compared with the 2.3 percent annual growth achieved previously.2 The total area under rice is projected to increase only slightly and mainly in Africa where land is more widely available and where larger tracts of current upland and swampland could be brought under cultivation. In the Far East and Near East, possibilities for increasing the area under rice are minimal. In Latin America the rate of expansion in the area planted to rice is expected to slow down because of the relatively high costs of producing rice. For the projected period, a 0.5 percent annual growth in rice area is expected in developing countries, compared with a 0.8 percent annual growth from 1970 to 1990. The modest annual growth of 0.5 percent is only possible assuming an increased cropping intensity on existing land.

Table 2

Projected rice production in developing countries (percentage annual growth)

With few opportunities to expand the area under rice, and assuming normal weather conditions would prevail throughout, such large increases in rice production will be possible only if the necessary technology and financial and political commitments are in place.

For many countries, however, the favourable conditions needed to generate the required expansion in output do not exist. By the year 2000 and even up to 2010, many regions are likely to remain dependent on external sources for their rice supplies. Out of the 19 million tonnes of projected rice consumption in sub-Saharan Africa by 2010, 32 percent would need to be imported. In the Near East and North Africa, con-sumption is projected to be 11 million tonnes of which 45 percent would have to be from imports; in Latin America, total rice consumption is expected to reach 22 million tonnes of which about 10 percent would have to come from outside the region; in the economies in transition, total rice consumption is expected to reach 4 million tonnes of which 25 percent would have to be supplied from external sources.

With such a reliance on external supplies, world trade in rice is likely to grow much faster than in the past decade. International rice prices are expected to increase sharply: by 2000, by some 15 percent in real terms over the base period 1988, a significantly larger increase than in the previous decade.

The projected limited improvement in per caput consumption of rice, the continued need of many poor countries to rely on external sources of supplies to meet their rice requirements and the likely increases in real world rice prices - combined with the declining availability of new land for rice cultivation - indicate that, in the medium and longer term, the problem of ensuring sufficient rice will remain. For those reliant on external supplies of rice and for those producing to meet this demand, stability in world rice prices is an important factor. Sharp fluctuations in international rice prices are not conducive to promoting an expansion in export supplies while unexpected increases in world rice prices could cause serious rice shortages and even political and economic instability for some countries. However, in recent years, the policies implemented have not been conducive for improving price stability in the world market for rice.

RICE PRICE INSTABILITY: CAUSE AND EFFECT

Only a very small proportion (about 4 percent) of global rice output is available for international trade, and the bulk of it is supplied by just a few countries. By its nature, small changes in supply and demand tend to result in relatively large changes in world rice prices. Juxtaposed to these, a series of policies have been introduced in the recent years that have contributed to even greater instability in the rice market. These include structural adjustment programmes and national policy reforms, influenced at least in part by the Agreement on Agriculture reached at the Uruguay Round of Multilateral Trade Negotiations.

Structural adjustment programmes

Structural adjustment programmes have been implemented in many rice-importing developing countries that have had large external debts and poor economic growth.3 While the longer-term effects of these policy changes could be to improve the rice situation and trading environment of these countries, their implementation has caused instability in the world rice market during the transition period. For example, the 50 percent devaluation of the CFA in West Africa in January 1994, which was endorsed by the International Monetary Fund (IMF) and the World Bank and was in line with the overall framework of the structural adjustment process, brought about an abrupt decline in the subregion's imports, following a decade of steady growth. In some countries, this encouraged production but the devaluation also resulted in a big increase in the prices of imported agricultural inputs. For other African countries, the high prices of agricultural inputs eroded the incentive to raise rice output, which was already small because of high production costs compared with the previously cheaper and higher-quality rice that could be bought externally. By then, other countries in the region had embarked on a phase of liberalizing and privatizing rice imports. In 1993, major rice importing countries such as C�te d'Ivoire, Nigeria and Senegal were still maintaining extensive rice import control measures but, by 1996 and early 1997, most of them had privatized rice imports. In September 1996, Senegal liberalized the imports of rice. In the same year, Nigeria lifted its official rice import ban. In January 1997, C�te d'Ivoire joined the group of countries with a privatized import regime. In 1996, Africa's imports reached a record of about 4.1 million tonnes, putting additional upward pressure on international rice prices, especially those of lower qualities, in the first half of the year. The rice import bill soared for many of these countries, which were engaged in cutting back external debts.

Reduced pursuit of self-sufficiency

Africa is not the only region caught up in a process of change. Many Asian countries that have been pursuing a policy of self-sufficiency in the past decade now find it increasingly costly to hold on to their stocks, accumulated as a result of such policies. Some of them have turned to exporting them, often very cheaply because they were drawn from old crops and because of the need to establish a place in a competitive export market. Viet Nam, since 1989, and India, more recently, have become large exporters of rice. In some years, Indonesia also has exported rice. The sudden influx of new exporters has brought about greater competition and low prices in the world market.

Table 3

Africa's rice imports (million tonnes) and the prices (US$/tonne) of fully broken rice, 1988-1996

Dramatic price reductions in the late 1980s and early 1990s, brought about by competition among exporters for market share, have further eroded the incentive to produce rice in importing countries. More important, depressed world rice prices have not augured well for investment in rice projects because the criteria used for selecting projects to be funded are normally closely tied to financial rates of return. When world rice prices are low, there is little incentive to develop domestic rice projects because it would appear to be cheaper to import from outside. In recent years, investment funds provided by international agencies for the support of rice-specific projects have undergone a massive decline. Public investments in rice-specific projects have fallen. International rice research as well as rice institutes and organizations have been forced to cut back heavily on rice development projects. The huge reduction in IRRI's resources in 1997 is just one example.

While declines in world rice prices could be taken as an outcome of excess supply relative to demand, thus justifying the policy moves towards reduced emphasis on rice production, this outcome must not be taken at face value. When Viet Nam joined the ranks of exporters in 1989, it was not because it had suddenly achieved a huge increase in output. It moved from being an importer to being a large exporter in a single year, mainly because of policy measures introduced in 1988 that removed the need to hoard rice as a means of exchange. Prior to this, rice was used essentially as a means of exchange for other essential commodities. In the case of India, its overnight change from being a small exporter, primarily of Basmati rice, to being the world's second largest exporter of rice in 1995, was in part because of the removal of export restrictions and the government's release of accumulated stocks.

The large supplies that became available on the world market in some years were, therefore, not necessarily fuelled by dramatic and continued sharp rises in world production of rice. They were drawn primarily from reserves built up by past progress in production. Unless production efforts continue to be sustained, the availability of supplies that have encouraged importing countries to reduce investment in domestic rice projects and to liberalize and privatize trade because rice had been cheaply available in the international market may not be available in the future. This could well threaten the future food security of these countries.

The Uruguay Round Agreement on Agriculture

The basic provision of the Agreement on Agriculture (reached under the Uruguay Round) applicable to rice, as for the other agricultural commodities, includes reductions in domestic support, improvements in market access and reductions in export subsidies. Reductions in domestic support, however, were not product-specific and, in view of the importance of rice as a staple food, it is not generally envisaged that developing countries will opt to meet their commitments by cutting back on support for rice.

But although there may not be significant reductions in domestic rice support emanating directly from the Agreement on Agriculture per se, the broad move towards reduced support for rice production that had started before the Agreement gained momentum following the Round's conclusion. The overall endorsement under the World Trade Organization (WTO) Agreement of the need to cut back on price-distorting support to agriculture, as well as the relatively comfortable levels of rice self-sufficiency reached in many Asian countries combined with the seemingly large availability in the international rice market, meant even greater confidence among countries to relax their pursuit of increased output of rice. In many countries, support prices in real terms have been allowed to fall; credit to farmers has been reduced and fertilizer and other input support either cut back further or even removed. Moreover, even when production support was not reduced, the privatization of trade following the Uruguay Round often resulted in a reduction in subsidies on inputs. In Bangladesh, for example, the privatization of fertilizer sales was followed by hikes in their prices, which adversely affected rice production.

Table 4

Global rice stocks and ratio of stocks to consumption

In many of the poorer developing countries, however, even at its highest, production support has never been large. Hence, any reductions in support have a serious impact on farmers' income and incentive to remain in rice production. Parallel to the weakening of farm incomes, the urban and industrial sectors in many of these countries have been expanding, often offering higher wage rates and better social amenities. In China, Indonesia, the Philippines, Thailand and Viet Nam, the rural labour force (often mainly rice farmers) is migrating to the urban sector. Paddy fields are being taken out of production and often converted to industrial use. Between 1993 and 1994, the total area under rice in Indonesia contracted by 278 000 ha as rice fields were converted to other uses. In China, the total area under rice fell from 33 million ha in 1990 to 29.5 and 30.7 million ha in 1994 and 1995, respectively. In India, the area under rice has largely stagnated at about 42 million ha, while per caput rice production has fallen.

Bangladesh, China and Indonesia have reverted to being importers in recent years; their combined purchases in 1995 accounted for over 30 percent of total world imports, pushing up international rice prices in 1995 and 1996. In those two years, the overall FAO export price index for rice (1982-84=100) gained a total of 22 points, at a juncture where many countries in Africa have moved towards greater reliance in imports because of low world rice prices in the late 1980s and early 1990s. More affluent countries such as Malaysia have also opted for a reduced self-sufficiency policy and import to meet domestic demand. In the Republic of Korea, the area under rice has contracted by 14 percent over the past decade as the country sought to reduce past accumulated stocks and to tune production levels to decreasing domestic demand for rice.

Thus, while the Agreement on Agriculture did not call for a specific reduction in efforts to produce rice in developing countries, its endorsement of reductions in price-distorting support for the overall agricultural sector could have reinforced the existing move in some developing countries to reduce national support for rice production.

MAJOR ISSUES OF CONCERN

The outlook for the world rice economy in the medium and long term is therefore uncertain because of increased instability in world rice prices. Among the various issues of concern connected to or accentuated by price instability and recent policy developments, four are especially worrying.

1. Reduced farm labour. As many developing countries are moving towards reduced price intervention in the production of rice, farmers bear the brunt of the effects of price fluctuations. This has contributed to a mass movement out of rice farming into alternative employment, a trend which once started is difficult to turn back because the abandonment of rice farming often also represents the breaking up of a social structure. Many countries have been forced to turn to more costly methods of production to replace farm labour. For exporters, this could herald a loss of their cost competitiveness.

2. Reduced international and national investments in rice research.The sharp cut-back in investments in rice research limits the possibilities of raising yields sufficiently to meet demand and of promoting sustainable production. Investments by international private corporations in rice research have risen but the results are not freely available. Access to research investment funds by countries, and ultimately farmers, is constrained by the cost of patent rights established on such research. And yet, raising yields, especially when land available for producing rice is limited, is of the utmost importance if the production of rice is to keep up with demand.

3. Farmers' less than equal share of increases in income under a liberalized trade regime. In years of low world prices, farmers often bear the full brunt of price declines. By the same token, in years of high world rice prices, the income of farmers should be boosted and, with that, their incentive to raise output. In reality, however, price increases are seldom passed fully or even substantially to farmers in developing countries. Market information in many of these countries is not available to enable farmers to benefit fully from a liberalized trade regime.

4. Declining stocks. The large expansion in global rice trade of nearly 10 million tonnes (an 85 percent rise) during the first half of the 1990s is funded to a substantial extent from a draw-down of stocks that have been accumulated in the past. Because it is costly to hold on to these stocks, they are often offered to the world market at below world prices creating greater disincentive to produce in importing countries and sending discouraging price signals to traditional exporters. Very often, countries that have sold off their reserves, which have been built up at great expense in the past, find themselves short of rice and in need of buying. These actions can contradict the objective and traditional role of reserves which are to provide a fall-back for countries in times of shortage and instability in the market.

POLICY MEASURES

The dependence on yields for achieving the level of production needed to meet consumption requirements in the future makes it imperative for continued research and development of varieties with increased yields and improved eating qualities. New varieties need to be readily available for replacing even recently developed ones because of susceptibility to pest infestation, and varieties capable of higher and more sustainable yields for different ecologies will have to be developed. National and regional technological and extension networks capable of developing and multiplying and distributing such varieties sufficiently rapidly to replace those that have succumbed to diseases will have to be established or strengthened. Post-harvest technology has to be expanded and improved, and, for this to happen, a whole range of research, extension and training, marketing and distribution programmes have to be in place.

Farmers will need access to technology and extension to keep up with technological developments and to be able to apply them. To do so, they have to be sufficiently motivated and rewarded. The income of rice farmers will have to be comparable with the income that could be earned from alternative employment if the migration of labour from rice to urban areas is to be stemmed. Providing accurate and timely rice marketing information is one way to help farmers and exporters keep in tune with demand and price their products better, and hence be better remunerated. For importers, such information will help them to find the most competitive offers in the world market. Liberalizing and privatizing trade without first installing the basic market information structure can increase distortions in the marketplace. Policy measures to improve output, trade and food security will also have to be made on the basis of sound market analyses and information. Finally, it may be opportune to initiate discussions and an exchange of views on how countries and regions could evolve a concerted approach to the holding and management of stocks. This would reduce the current adverse impact of countries being forced to download large stocks into the global rice market, resulting in downward pressure on world rice prices causing the same countries to face rice deficits and hence the need to buy in the following year.

¹ After the huge increase in yields in the 1960s and 1970s, the period of the green revolution, there has been a significant slowdown in growth in yields. In the future, increases in yields may come less from countries that have already achieved high yields but more from those with lower and medium yields. Already, national average yields in some of the main Asian rice-producing countries have stagnated over the last three years.
In China, national average yields have remained at about 6 tonnes/ha during this period; in Thailand, at around 2.3 tonnes/ha; and in India and Indonesia, at about 2.9 and 4.4 tonnes/ha, respectively. While new varieties of rice with high yield potential continue to be discovered, the yield advantages are often more than offset by the advantages of quality rice available from lower-yielding traditional varieties. Quality considerations have been a major factor constraining the adoption of some of the higher-yielding modern varieties.

² The base year of the projections is the three-year (average) period 1988-90.

³For further details on structural adjustment in West Africa, refer to the paper, The impact of structural adjustment programmes on the rice economies of selected countries in West Africa (CCP: RI: 94/2), which was presented to the 37th Session of the Intergovernmental Group on Rice, 28 November to 2 December 1994 in Bangkok.

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