Rice crisis: Are governments over-reacting?

By W.A. Wijewardena

The reaction by various governments throughout the globe to the rising prices of rice, staple food of many Asians, was the topic of discussion in my economics class that day. Students were aware of what their government had done: controlling the prices of popular varieties of rice, threatening sellers and millers who violate the control with severe punitive action and using the bureaucracy to enforce the control to the letter. But, they were not very clear about what other countries had done. I put them in the picture so that they could participate in the discussion effectively.

“The price of rice in the international markets shot up during March and early April in 2008. So, the benchmark rice in the market, Thai medium grade short grain rice, rose from around $360 per metric ton to around $980. The reasons were numerous. The extensive use of corn for biofuel raised wheat consumption and Australian drought reduced its supply. So, wheat prices rose and the effect was a shift of consumption to rice. Meanwhile, rice consumption too increased independently by higher income in both China and India. The result was a shortage of rice leading to its price sky-rocketing in the world market. When the domestic prices went up, governments attempted to minimise the impact on the consumers by first controlling prices and then, in the case of rice-exporting countries, banning exports. India introduced a ban through the fixing of a floor price for exports. Then, an idea was also mooted to set up a cartel of rice exporters similar to the cartel set up by petroleum exporting countries. This is the background to the issue,” I said.

“Do you think that controlling the price of rice was a good policy measure?” I asked them. The class was divided equally. One half said that it was a good policy measure, while the other half did not agree. “Why do you say that it was a good measure?” I asked those who endorsed the measure. “Because rice is the staple food and it should be supplied to consumers at an affordable price,” they chorused. Then, I asked the other group why they said that it was not an appropriate policy. Their argument was that price controls could not be effectively enforced and therefore, they did not work. I did not get a good economic argument from either group. So, I probed further.

A girl from the rice bowl of the country had a sound explanation. “I come from a rice farming family and everyone in my village is a rice farmer,” she began to explain. “Over the last few years, we observed that rice farming was not profitable, because the cost of producing rice had gone up and the market price was not high enough. In our area, it cost some Rs. 110,000 to cultivate one hectare and our output was about 4,000 kg per hectare. So, it cost us some 27 rupees to produce a kilogram. But the market price was less than 20 rupees. This made rice farmers to abandon some of the fields and shift to high earning cash crops like banana and papaya.

But, when prices went up to 32 rupees per kilo and then to 45 rupees per kilo, everybody became attracted to rice again,” she said. “So what’s the problem?” one of the students asked. “That is the whole issue,” she countered him. “When the price was controlled, nobody came to buy our paddy. So, we could not sell even below our cost. The result was that the initial enthusiasm about growing more rice was obliterated. People have refrained from selling existing stocks and stopped converting the lands used for other crops into paddy. So, there is not enough supply today. There won’t be enough supply tomorrow also, because paddy’s attractiveness has now gone”

“This is a good case,” I said. “But, what can we learn from it?” I asked them. “The lesson is clear,” one student said. “If the farmer doesn’t get a price to cover at least his cost, he will not produce. So, we will not have rice today and we will not have rice tomorrow either. Hence, rice issue will be a perennial issue.”“But, what would have happened if the government did not control prices?” another student asked.

The girl from the rice bowl area answered: “Then, the prices would temporarily remain high but would fall again when the new crop comes to the market. It was just a matter of living through the high prices for a few months. Markets would have taken care of the shortage. Now, unless we import rice, the market shortage cannot be filled.”

“But, the world market prices are high and even the imported rice would be costly, if that rice is available for us to buy,” another student opined.“That is the problem,” I intervened. “The world’s governments have aggravated the issue by banning exports. It would prevent farmers from producing more globally. So, it would reduce the global rice supply. On top of that, local production wouldn’t grow, because farmers won’t get a price to cover their costs. Farmers outside the rice bowl are the worst affected because their output is very low and costs are prohibitively high.”

“What can we do?” some of the students were now desperate. One student had the answer. “We have to increase the total output as well as the output per hectare. That means we want a second green revolution that would liberally use modern genetic technology.”