One-fifth of the calories consumed by human beings come from rice. Rice is the staple diet for half the world’s population. The price of rice futures on the Chicago Board of Trade has increased 86% since last summer.
The US Department of Agriculture’s latest estimate for global milled rice production in 2008 is a record 425.3 million tons. But, projected year-end stockpiles of 77.2 million tons will be just half what they were in 2001. Rice is unusual in that only about 6.5% of the total global harvest is exported. The rest is consumed in the countries where it’s grown. For example, China, which grows 30% of the world’s rice, consumes 98% of its production. Indonesia, the third largest producer, is a net importer. The United States accounts for a mere 1.5% of global production, yet we are a major rice exporter because we consume less than two-thirds of what we grow.
Thailand is the world’s number one rice exporter by far. Though it grows less than 5% of the world’s rice, it represents a third of the export market. Export prices for Thailand’s top-grade milled white rice have risen 58% just since March and have more than doubled since late January. The year-over-year price increase is 163%. Vietnam is another major exporter, but its authoritarian government recently "asked" rice exporters to stop signing new contracts, at least until June. The government is also considering a special tax on exports. As a result, Vietnam’s exports are expected to decline 11% in 2008, and prices could rise 30% more, from $700 to $900 a ton. China, India, and Indonesia have also imposed export restrictions, and Pakistan will ship 15% less rice because of power shortages at rice mills.
The Phillipines are at the other end of the spectrum. Already the world’s largest rice importer, the country is expected to increase this year’s imports 42% to curb speculation. Phillipines President Gloria Arroyo recently warned against hoarding and threatened jail to anyone "stealing rice from the people." US ambassador Kristie Kenney promised to supply all the rice needed, not so much for humanitarian reasons, but because the Phillipines is "a front-line state in the war on terrorism."
The rapidly rising cost of rice is not an isolated incident. The United Nations Food and Agriculture Organization reported a 57% year-over-year increase in global food prices.
Commodity prices in general have been on the rise for seven years, for a variety of disparate reasons. One, perversely, is that the developing world is becoming more affluent. Ernst Engel, a 19th
Century Prussian statistician, was the first to demonstrate that poorer households spend a greater percentage of their income on food than wealthier households. At the lowest economic strata, 80% or more of a family’s income may go for food, and poorer families subsist on the cheapest source of calories. As income increases, more meat and less starches are consumed.
Animals thus become competitors for grain with people, and since meat and dairy products are more profitable for growers, guess who wins. In the 21st
Century, machines are becoming competitors too. Corn, wheat, soybeans, palm oil and maize are in demand as the raw material for bio-fuels. According to the World Bank, almost the entire increase in world-wide maize production between 2004 and 2007 went for bio-fuels. Rising energy prices also contribute to rising food costs by making transportation more expensive.
Another reason for rising commodity prices is speculation. Citigroup reported that investments by speculators in commodities have increased by $70 billion or 21% so far this year. Climate change is having an impact, too. Australia has been in a nearly continuous drought for seven years and during that time, its rice production has been virtually nil. In the US, heavy rains and flooding in the Mississippi delta will curtail production. More acerage in West and Sub-Saharan Africa is coming under production, but, with desertification increasing, it tends to be of poorer quality, resulting in lower yields.
Because of rising energy and food costs, inflation is building throughout the developing world. The International Monetary Fund has estimated that consumer prices in emerging economies will rise 7.4% this year, the most since 2001. In many countries, inflation will be much higher. Some places are surprising. In Latvia the inflation rate was 16.8% in March and food costs rose 21%. Next door in Lithuania, inflation rose 11.3% with food up 18.1%. The numbers for Egypt are 12.1% and 16.8%. Even in China, inflation is at an 11-year high.
Many governments are responding to rising inflation by imposing price controls. In Mexico, for instance, the government capped the price of corn tortillas at 8.5 pesos a kilogram last year. The cap is now expiring and the price of tortillas is predicted to rise to 15 pesos. The Russian government is imposing controls on bread, eggs, and milk. The World Bank reports that 21 countries, from Argentina to Yemen, now have price controls on staple foods. Price controls, however, are not free. In a globalized economy they create distortions that can easily produce more harm than good, plus they often don’t
work. Controls dampen domestic production bcause they lower farmers’ profits. In response, farmers naturally turn to growing non-controlled crops or seek ways to avoid government oversight. At the consumer level, the results are hoarding, shortages, and black markets. To prevent these consequences, the government is forced to provide deep subsidies. As the subsidies strain the government’s resources, the temptation to print money beomes irresistible, stoking the fires of inflation. When controls finally become unsustainable, an outbreak of inflation, in some cases, even hyper-inflation, is inevitable. This is just what happened in the United States in the early 1970s. President Nixon imposed a freeze on prices and wages for nearly three years to reduce the unacceptably high 4% inflation rate. By the time the controls were lifted, inflation was running at 10%.
Nothing breeds anger more than hunger. Food riots have broken out around the world in recent days, from West Africa to the Carribean, from Egypt to Indonesia. In a widely quoted remark, World Bank President Robert Zoellick, said, "The World Bank Group estimates that 33 countries around the world face potential social unrest because of the acute hike in food and energy prices. For these countries, where food comprises from half to three-quarters of consumption, there is no margin for survival."
For the past year, most of my commentaries have focused on housing and financial market issues affecting Americans. Serious as our current problems are, it can be useful to keep them in perspective. When government statisticians measure core inflation in the United States they exclude food. Changes in food prices are deemed too volatile to be useful in determining the true cost of living, and besides, Americans, on average, spend less than 15% of their income on food. What a luxury!