A sustained rise in rice prices could revive concerns about inflation in Asian economies and rekindle debates over regulation of food markets, economists have warned.
Rice prices remained relatively muted for much of last year and early 2011 as the price of wheat and other food staples rose dramatically. This has helped to keep inflation relatively modest across much of east and south-east Asia, with the exception of Vietnam.
However, rice prices rose 7.3% between March and August, hitting a 30-month high, in contrast to wheat and oil, which have declined over the same period.
Frederic Neumann, an economist at HSBC, blames a policy from the new Thai government, which has pledged to pay 40% above current market rates for rice starting on October 7. “There is widespread hoarding among traders and consumers as the price of rice is expected to nearly double once this policy is implemented,” he wrote in a research report published this week.
Neumann said the rise “is not enough to drive a full-blown spike in Asean headline inflation. However, the risk of more material upward pressure in food prices remains.”
With food prices foremost among policymakers’ concerns for much of the past 12 months, debate is raging over issues including market regulation, food stocks and demand management, in the run-up to next month’s meeting in Rome of the Committee for Food Security, the UN umbrella group that co-ordinates policy responses.
Measures including market mechanisms to forestall price volatility, effect greater transparency, and ensure systematic management of physical stocks, are reviewed in a joint report issued to the G20 in June by the IMF, World Bank, OECD, UN Food and Agricultural Organisation (FAO) and six other agencies.
But a UN High Level Panel of Experts (HLPE) has argued for a tougher, “precautionary” approach to guard against speculation, arguing that unregulated markets have “potentially enormous” downsides for food security but “no clear benefits”.
The panel also called for “serious debate” both on managing demand for agricultural commodities, and specifically the impact of biofuels, and on the arbitrary use of export restrictions by big exporters. Finally it argued that multilateral governance of food stocks, an essential part of safeguarding food security, is long overdue.
“The issue of physical stocks is complex: for one thing, they are expensive to maintain. But the cost of having them needs to be compared objectively to the cost of not having them,” said panel member Sophia Murphy.
“Big agricultural exporters and agribusiness are not in favour of stocks because they put downward pressure on prices.
“We hear an argument that stocks make it difficult for market signals to come through. But what happened in 2007-08 is that the signals from the poorest consumers were simply not heard. A demand shock was produced by biofuels, whose demand is inelastic to prices – but demand from millions of poor people, who spend 50% of their outgoings on food, is very elastic, and they suffered.”
Murphy, a research fellow at the Institute for Trade and Agriculture Policy, said trade rules “must better reflect food security priorities.”
George Rapsomanikis, senior economist at the FAO, told Emerging Markets that physical stocks would be the most significant area of disagreement at the CFS meeting. “We recommend the maintenance of strategic ‘safety net’ stocks, but buffer stocks are ineffective to defend a price ceiling.”