RAGHAV GAIHA & VARSHA S. KULKARNI: Much has been written on the soaring in recent months of food and oil prices. There is near consensus that this surge in food prices — termed agflation — is likely to persist five to 10 years. The boom in emerging economies and the rising demand for oil and its substitutes are unlikely to slacken in the near future. Consequently, demand pressures on food prices will continue to be strong.

Recent assessments are emphatic that supply constraints will exacerbate agflation. Aggregate price elasticity of supply is low — typically, agricultural supply rises by one or two per cent when prices increase by 10 per cent. This supply response is weaker if prices are volatile, but stronger with better rural infrastructure, and access to technology and rural finance. There are signs of a tightening of supply constraints — specifically, in addition to land scarcity, lack of water would impede higher agricultural productivity.

The World Bank, FAO and several commentators have painted a grim picture: reversal of progress in achieving the MDG of halving poverty by 2015, widespread social discontent and food riots, and political instability. The menu of advice offered comprises targeted food and input subsidies, and cash transfers in the short-run, and greater investment in rural infrastructure, appropriate technology, and easier access to credit in the medium-run. Although the details are not spelt out — for example, whether it is feasible to reform the PDS in India, in which it costs Rs 6 to transfer a rupee worth of food to a poor person, and if it is, how — there is undoubtedly some merit in these proposals. The response of many developing countries, however, has been frenzied. A case in point is imposition of curbs on rice exports to protect domestic consumers from likely shortages and spiralling prices in the global market. The Grain Market Report released by the International Grains Council, London, last month throws valuable light on the inflationary potential of these curbs.

Global rice prices have soared in recent months, with price quotations at record highs in April. In Thailand, the leading global supplier of rice, export prices of 100 per cent B grade white rice rose by 155 per cent between January 1 and April 16. In April alone, it rose by $270, or 40 per cent, to $960 free on board (fob). In the US too, Chicago futures touched new peaks on an almost daily basis. Whether the cancellation of rice auction by the Philippines on May 6 would compensate for the destruction of rice crops wreaked by Cyclone Nargis in the Irrawaddyy delta in Myanmar is far from obvious as surge in rice futures continues unabated. This is presumably a reflection of difficulties in planting the next paddy crop in the cyclone affected area in Myanmar.

The spiralling rice price must be analysed in the context of global rice supply and demand balance. Early indications are that global rice production and demand are broadly in balance but there is a tightening of market supply in part exacerbated by Myanmar’s inability to meet its rice export obligation of 600,000 m tonnes. The tightening of supplies is closely linked to a frenzied response of banning rice exports (eg Vietnam, Cambodia, Egypt, and India). Tightening of market supplies and surging rice export prices are likely to result in a sharp contraction of trade. The forecast for 2008 is projected to be much lower than previously — at 27.6 million tons, compared to 29.9 million tons.

Several rice importing regions are likely to curtail their rice purchases. In Asia, for example, imports are likely to decline by five per cent, to 12.6 million tons. In Far East Asia, the Philippines is expected to buy more to calm the domestic market — about 2.1 million tons, compared to 1.9 million tons — in part deferred by the cancellation of the rice auction.

But smaller purchases by other countries (eg Bangladesh, China and Indonesia) will more than offset this increase. The sharpest cuts in 2008 will be borne by Africa, a large buyer of non-basmati rice from India. A ban on non-basmati rice exports from India along with sharply higher prices at all origins is likely to result in significantly lower rice imports, projected at 8.2 million tons, as against 9.6 million tons.

In India, a complete ban on non-basmati rice exports introduced in late March is likely to lower rice exports by two-fifths to three million tons. Vietnam has lowered its export target to 4 million tons from 4.5 million tons. Since Thailand does not have any restrictions on trade, its rice exports were substantially higher in the first three months of this year. But with government stocks depleting fast, it may end the year with a slight reduction in exports (9 million tons, as compared to 9.3 million tons). China’s cancellation of a VAT rebate and a five per cent tax on exports, however, have not had a negative effect on its exports. Pakistan’s exports are also likely to be higher, supported by higher prices of basmati rice.

One useful insight is that trade restrictions (eg banning of rice exports) as a short-term palliative could make matters worse not just for (net) rice importers but also exporters — especially by denying rice producers gains from trade. That the poor for whom rice is a staple food — especially in South Asia — would in general also benefit in the counterfactual of no such trade restrictions is of course unexceptionable. So, if this analysis is anything to go by, the ‘price’ of export curbs may in fact be much higher than anticipated.

(Raghav Gaiha is a Professor of Public Policy, Faculty of Management Studies, University of Delhi. Varsha S. Kulkarni is a visiting scholar from the University of Wisconsin, Madison)

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