Price Spikes and Volatility

The New Face of Global Agriculture

Samarendu Mohanty International Rice Research Institute

Outline
Current Situation
Are we headed for another food crisis?

Why price spikes are more frequent and prices are more volatile now? What can be done to lower volatility? Some closing remarks

Impeccable Track Record

650 600 550 500 450 400 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May- Jun-10 10

Making Headlines around the World

India
Why food is costlier and TVs cost less

Vietnam China

Chillies heat up Indonesian inflation fight Source: Financial Times

Government crackdown on onion hoarders Source: NDTV and Rediff 50% rise in rice price between July and November 2010 Source: Asiasociety.org China Moves To Control Food Price Inflation Food price inflation: 8-10%

Increase in Commodity Prices (June December)

Percent

Monthly Crop Prices

$/Mt

Data Source: Indexmundi.com

Thai 5% Broken Rice Price

(March 1998 to Dec. 2010)
US$/t (fob)

Source of raw data: The Pink sheet, World Bank

Trend in Rice Retail Prices

Source: Global Food Price Monitor, FAO

Cotton A-Index Price

Cents/lb
180 160 140 120 100 80 60 40 20 0
Jan. Apr. 06 06 Jul. 06 Oct. Jan. Apr. 06 07 07 Jul. 07 Oct. Jan. April Jul. 07 08 08 08 Oct. Jan. April Jul. 08 09 09 09 Oct. Jan. April Jul. 09 10 10 10 Oct. 10

Data Source: Indexmundi.com

World & U.S. Corn Production

000 MT

Data Source: USDA

World Wheat + Barley Production

000 MT
900000 850000 800000 750000 700000 650000 600000 550000 500000 450000 400000 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11
> 60 mmt decline in production

Data Source: USDA

000 MT

300000 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11

340000

380000

420000

460000

500000

Data Source: USDA

Global Rice Production

Extreme Weather on 2010/11 Grain Production Estimates

Million tons
2280 2260 2240 2220 2200 2180 2160 2140 2120
May-10 Jun-10 Jul.-10 Aug-10 Sept-10 Oct-10 Nov-10 Dec-10 Jan-11

80 million tons downward revisions

Source: Various issues of World Agricultural Supply and Demand Estimates

Percent

10

15

20

25

30

35

40

0 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 Rice 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 Barley Wheat Corn

Data Source: USDA

Global Grain Stocks-To-Use Ratio

World Food Grain Consumption

000 MT

700,000 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11

Data Source: USDA

Rice

Wheat

U.S. Corn for Ethanol

Million Bushels

6000

39%
5000 4000

3000

20%
2000 1000

6%

0 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11

Source: FAPRI & USDA

World Crude Oil Price*

$ per Barrel 160
140 120 100 80 60 40 20 0
Jan 07, 2005 Jun 07, 2005 Nov 07, 2005 Apr 07, 2006 Sep 07, 2006 Feb 07, 2007 Jul 07, 2007 Dec 07, 2007 May 07, 2008 Oct 07, 2008 Mar 07, 2009 Aug 07, 2009 Jan 07, 2010 Jun 07, 2010 Nov 07, 2010

Data Source: U.S. Energy Information Administration

Data Source: Indexmundi.com *Weighted by export volume

Sharp Rise in Global Oil Consumption

Million Barrels per day
89 87 85 83 81 79 77 75
05 :1 05 :4 05 :7 05 :1 0 06 :1 06 :4 06 :7 06 :1 0 07 :1 07 :4 07 :7 07 :1 0 08 :1 08 :4 09 :3 10 :2

Production

Consumption

Source: U.S. Energy Information Administration

US Dollar Index

Source: Stockcharts.com

Source: Mike Masters Congressional Testimony

SPGSCI investment at 3-year Peak

Billion Dollars
120

50% return in 2010

100 80 60 40 20 0 End of 2005 End of 2007 End of 2009 End of2010

Data Source: http://www.reuters.com/article/idUSN0721920420110107

What Determines Price?

Price Supply

Demand Quantity

Rising Price Volatility

US$/t (fob)

Thai 5% Broken Rice

Source of raw data: The Pink sheet, World Bank

Food Policy Shifts

Achieve food security through food self-sufficiency
Enough food for all citizens by expanding domestic production.
Rise in domestic support prices. Input subsidies (fertilizer, seed, diesel, etc.) Trade restrictions.

Renewed focus on regional rice reserve. G to G trade on the rise again.

Too Much Distortions in Rice Trade

Country
Bangladesh China India Indonesia Japan South Korea Taiwan Malaysia Myanmar Philippines

Trade Restrictions
Export ban; Import controls Export quota; Import TRQ Export ban on nonbasmati and minimum export price for basmati; Import controls Export control; Import ban Restricts imports to MMA quantity Restricts imports to MMA quantity Restricts imports to MMA quantity Imports by state agency alone. Export tax quantitative restriction on imports

World Rice Trade

000 Metric Tons
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
61 0/ 6 64 3/ 6 67 6/ 6 70 9/ 6 73 2/ 7 76 5/ 7 79 8/ 7 82 1/ 8 85 4/ 8 88 7/ 8 91 0/ 9 94 3/ 9 97 6/ 9 00 9/ 9 03 2/ 0 06 5/ 0 09 8/ 0

Data source; PSD, USDA

Price Volatility on agricultural Productivity

$ per Ton

Rice

$ per Ton

Fertilizers

Greater variability in input and output prices negatively affect crop yields.

Food Price on Hunger

Price Hike on Poverty: The Case of Bangladesh

Jan. 2005 and March 2008: About 12 million people have been added to the poor population (Rahman et al. 2008). Head count poverty increased from 41.52% in 2006-07 to 45.86 per cent in FY 2007-08 (Raihan et al 2008), i.e., nearly 7 million people were added back into poverty. Food price hike in early 2008 had negatively impacted food consumption and nutrition situation in Bangladesh (Sulaiman, Parveen and Das 2009).
Source: Mohanty, Uttam Deb and Bhandari

What Needs to be Done?

Trade and Market Reforms
Allow grain to move across borders
Let private sector do the trading.

Organized retailing
Will bring greater efficiency in the supply chain Lower spread between farm gate and retail prices Link producer and consumer prices more closely.

Replace price support (MSP/mortgage price) with direct income support

Lower market distortions Minimize budgetary costs

Transformation of the Global Soybean Market

100% 80%

60%

40%

20%

0% 70/71 73/74 76/77 79/80 82/83 85/86 88/89 91/92 94/95 97/98 00/01 03/04 06/07

United States

Brazil

Argentina

Rest of the world

Data Source: USDA

Chinese Dependence on Foreign Soybeans

000 MT

50,000

Domestic consumption
40,000

Imports

30,000

20,000

10,000

70/71

74/75

78/79

82/83

86/87

90/91

94/95

98/99

02/03

06/07

Data Source: USDA

Rice Futures & Spot Exchange

At the ASEAN level
Based in Singapore. Traders from 10 member countries can buy/sell futures contracts Biggest stumbling block: Government intervention in trade

What it will achieve?

Transparency in price determination Market stabilization Improved credibility of rice trade

Hopefully, countries will abandon the idea of forced self sufficiency.

U S $/to n 1000 1200 1400 200 400 600 800 0

J an 05 M ar 05 M ay 05 J uly 05 S ept 0 5 N ov 05 J an 06 M ar 06 M ay 06 J uly 06 S ept 0 6 N ov 06 J an 07 M ar 07 M ay 07 J uly 07 S ept 0 7 N ov 07 J an 08 M ar 08 M ay 08 J uly 08 S ept 0 8 N ov 08 J an 09 M ar 09 M ay 09 J uly 09 S ept 0 9 N ov 09 J an 10 M ar 10 M ay 10 J uly 10 S ept 1 0

Thai Hom Mali

Thai Hom Mali Grade A vs Thai 5% broken

Thai 5%

US$/ton 1000 1200 200 400 600 800

J an 05 A pr 05 J uly 05 O c t 05 J an 06 A pr 06 J uly 06 O c t 06 J an 07 A pr 07 J uly 07 O c t 07 J an 08 A pr 08 J uly 08 O c t 08 J an 09 A pr 09 J uly 09 O c t 09 J an 10 A pr 10 J uly 10 O c t 10

0
Viet 5% Thai 5% Parboiled Thai 100%

Thai 5% vs other major grades

Closing Remarks
In my book, we are already in crisis. Given lower buffer stocks+ nexus between food and fuel, expect greater price volatility and frequent spikes in the future.
Thin global market+ excessive trade distortions make rice price even more susceptible to supply and demand shocks

There is no single silver bullet to fix it

Of course, we need to produce more. Time for another revolution: Market and trade
More so for rice than any other commodities

Kick start WTO negotiation ASAP