International rice prices stabilizing

MANILA, Philippines – International rice prices are stabilizing but oil prices continue to exert inflationary pressures, a study by the Economic Intelligence Unit (EIU) showed.

Four years ago, disease and poor weather reduced rice output, particularly in Asia, at a time when stocks were already low.

This caused prices to shot up dramatically, leading to a major bout of global food price inflation.

Now, global rice prices are ranging from a high of over $1,000 per ton to as low as $360 per ton, depending on the quality of the grain. But the general trend is that prices are nearing the lower levels in the May to June period.

“Inventories are more than ample, and unless production in India proves unexpectedly poor, shortages in the global market seem unlikely,” the EIU report released recently said.

It added that India’s monsoon picked up, and the affected dry areas are in the south and west of the country rather than in the north, where the mechanized and more productive rice farming takes place.

Meanwhile, Thailand’s rather bungled policy efforts to manipulate the global rice market also seem to have backfired, creating a huge stockpile that will eventually create downward pressure on prices instead of supporting the market as the government had hoped.

“The main caveat is that rice is an extremely thinly traded commodity – only about seven percent of all rice produced is traded internationally – and that even small changes in the market can have a disproportionately large global impact,” it warned.

The EIU further cautioned that the broader implications of continuing high global food prices are varied. The situation is potentially inflationary—especially in countries in which spending on food accounts for a relatively large share of consumers’ income.

The report said that high inflation is a potentially unwelcome development at a time when most central banks are struggling with weak or slowing economic activity and are either easing monetary policy or maintaining loose monetary policy. “A sudden need to tighten policy in response to food-driven inflation could imperil broader efforts to support economic recovery,” it said.

A further complication is the effect of oil prices, which contribute significantly to food prices through fertilizer and transport costs.

The EIU said that global oil prices have not reached the highs they hit either in March this year or in mid-2008, but they have risen sharply since their recent trough in late June. If high prices are sustained for whatever reason—for instance, as a result of geopolitical tensions involving Iran—this would be a bullish factor for food markets.

The consulting group said that 2013 is distinctly uncertain.

Depending on demand trends and other factors, prices would ease if supply pressures related to recent weather problems disappear. The effects of the recent ultra-dry conditions will linger, negatively affecting prospects for next year’s crops, it said.

The World Bank sounded the warning that increasing global food prices of 55 food commodities, including meat, dairy, sugar and cereals, would seriously impact on the lives of millions worldwide.

The recent tightness in supply makes food commodity markets more vulnerable to the slightest additional shock on the weather front, which could then lead to “worst case” price scenarios being realized.

The EIU is an independent business of The Economist Group. It offers research and analysis, forecasting and advisory services.