RP triggers spike in world rice prices

The Philippines may have triggered the spike in world  rice prices because of its aggressive and huge pre-announced orders when key global market suppliers are cutting their exports.

As the government frets over the rice crisis, Deutsche Bank said runaway inflation was a more serious threat than the subprime shock since it would reduce the value of household budget in an economy with low savings.

In a panel discussion hosted by Deutsche Bank AG, experts agreed that there was a supply and demand imbalance but the rice crisis would eventually pass.

Deutsche Bank strategist Anton Periquet said in a global market research that the rice crisis was a shock whose effects could be easily forgotten within a year, much like the bird flu in 2001.

“This is the logic behind why commodity price increases are counted as part of the non-core component of inflation,” Periquet said. “They are supposed to be non-recurring in nature.”

According to Periquet, there were suspicions among economic experts that the spike in world prices might have been fueled, in part, by the Philippine government’s aggressive and pre-announced buying into a thin market.

At the time, key suppliers Thailand and Vietnam were curbing exports and since the Philippines was the world’s biggest importer of rice, its decision to broadcast its move had the effect of swinging market forces.

According to Periquet, less than 10 percent of world production was traded globally. “Think of the Capital Group trying to buy up half of the free float in Jollibee Foods Corp and announcing it beforehand,” Periquet said.

Periquet said most experts believed that market forces would correct the rice situation over time and there might be a future rush to sell stocks and take advantage of these prices once it was realized that they were not sustainable.

According to Periquet, experts in the panel discussion also pointed out that at current prices, farmers are planting more rice which would take five to six months to grow and is harvested twice a year, suggesting that in the absence of supply bottlenecks, shortages need not last for extended period.

Periquet said the real danger was how government would respond. He said politicians could panic and respond to the temporary shock with measures that would increase costs permanently.

These measures include a legislated wage hike that would outstrip growth in productivity which would risk triggering a supply chain reaction that Periquet said would be almost impossible to reverse.

“Runaway inflation is to us a more serious threat to the Philippines than the subprime shock,” Periquet said. Apart from raising business costs, he said it would also reduce the real value of household budgets in an economy with low savings buffer.

“The effect on discretionary spending will be immediate, with negative implications on company earnings,” he said.

According to Periquet, the German bank was not overly concerned about the rice issue at the moment although it was “watching closely developments on this front.”