International pricing: The futility of controlling rice

A first lesson in economics is that, supply and demand determines the price of a commodity. If you fix a price below the market or equilibrium price, then demand exceeds supply, and all sorts of problems of rationing and distribution occur. The only effective means of reducing price, is to increase supply or reduce demand. Taming commodity prices through draconian laws, end in corruption. Even the mighty Soviet Union, at the height of its power, failed to control commodity prices, through stringent laws. Such efforts end up in more shortages, than the original situation, corruption and misallocation of resources. This is more so, especially in countries of South Asia and in Sri Lanka, in particular.

The rise in rice prices, is a global phenomenon caused by shortages in rice production around the world. International rice prices have increased twofold, in the last few months. Droughts in several parts of the world, have affected rice production in major rice producing countries. This is one of the most important reasons, contributing to skyrocketing prices.  For instance, in Australia six long years of drought has taken a toll, reducing Australia’s rice crop, by almost one half. The collapse of Australia’s rice production, is one of several factors, contributing to a doubling of rice prices, in the last three months. In Thailand, the world’s largest exporter of rice, prices have doubled in recent months. This has led to the world’s largest exporters, restricting exports severely. India is the case we know best, as a country that restricted its rice exports, and in fact banned rice exports. There has also been hoarding of rice, in Hong Kong and the Philippines.  Further, even in normal times, little of the world’s rice is actually exported. About 90 percent, is consumed in the countries where it is grown. In a context, where exportable surpluses are small, a fall in production coupled with increases in demand, lead to sharp increases in prices. This is precisely what has happened.

In the last quarter-century, rice consumption has outpaced production, with global reserves plunging by half in the last seven years. In Vietnam, an exporter of rice in the last decade, a plant disease has reduced production and cut its exports. These developments have led producers, middlemen, speculators and investors to hoard rice. Thus aggravating the situation is the rising prices, even higher than warranted by supply and demand. The soaring prices of rice in international markets are therefore, due to climatic conditions, increased consumption, plant diseases, hoarding and speculation. Several international organisations are of the view that, many rice producing countries over reacted, and thereby aggravated the situation.

In this emerging international food crisis situation, other developing countries have also adopted measures, to control rice prices, as we have done. The end result of such actions are food riots, hoarding of stocks, shortages and even still higher prices. These actions have led to enormous tensions and social unrest, with hardly any of the deserving people, benefitting from the legally enforced price. The skyrocketing of rice prices have set off violent protests, in many countries, including Cameroon, Egypt, Ethiopia, Haiti, Indonesia, Italy, Ivory Coast, Mauritania, Uzbekistan and Yemen. This has been so, even in major rice producing countries in Asia, the Philippines and Thailand. There are signs of unrest, in other Asian countries as well.

The Sri Lankan government was however, in an unenviable position. The estimate of a shortfall in production, came somewhat late, as it was difficult, to predict it. Here too, the government was in a bad position. The shortfall in production was not predicted, as it was the result of rains and flooding, at harvest time. Food prices had reached soaring proportions, and when the staple rice reached Rs. 100 per kilo it certainly struck the poor, an unbearable blow.  Had the situation been predicted earlier, the import of rice, could have been a few months earlier. However, by the time shortages were felt in the country, international rice stocks were small and international price of rice high. Some countries, in the interest of their own food security, had banned the export of rice. For this reason, the government had to intervene diplomatically and obtain rice, as a friendly gesture rather than, as a usual commercial transaction. The import of rice from Myanmar, India and Pakistan at lower prices, would certainly help, but enforcing a price ceiling, is unlikely to result in relief to consumers, on a large scale. Yet even, where this lower price of imported rice is concerned, its distribution can pose problems, if there is a substantial difference, between the price of the imported rice and the local rice.

The rice situation in the country, appears to be rather varied. In some of the Colombo suburbs, rice was available at as low as Rs. 55 to 65, as it was in some other areas in the country, as well. Therefore, the action of the government to impose a price ceiling ceiling, appears to have aggravated the situation. In fact, even after the price imposition rice was available, at certain markets, at lower than Rs 70. This is not to deny that, some consumers had to pay Rs. 100 per kilogram, just before the New Year. However, the action of the government may have aggravated the situation, with rice stocks being taken off, from the market. The reported actions of the government trying to intervene the situation, with its police and military powers, could have hardly helped the total situation, owing to the widespread nature of rice stocks, and possible corruption, by these officials, as well. Such military and police intervention, besides being unlikely to reduce prices on a broad front, introduces another element of violence, into our society. Perhaps, the government faced with unpopularity, reacted too early and in the wrong manner.

What we can now hope for is that, prices would stabilise somewhat, owing to the import of rice, release of stocks, better harvest in Yala, and a shift in consumption, from rice to yams, breadfruit, jak and other substitutes. In the long run, the better prices for paddy should be an incentive for farmers, to increase their productivity. It is therefore, vital for the government, to take measures, to improve the support for agriculture, for achieving increased yields and production, and be self-sufficient in rice.