A sleepy rice market: the calm before the storm?

April 2, 2011

Global food prices are on the rise again. In January, the food price index exceeded the level witnessed during the peak of the 2008 food crisis when rice prices nearly tripled. The second food crisis in 3 years has led to riots and protests in many developing countries and has raised a serious question among many whether cheap food has become a thing of the past. It is also worthwhile to note that the International Monetary Fund food price index had been on the rise long before the 2007-08 spike, and, in the last 10 years, the index has nearly doubled even without taking into account both the 2007-08 and the 2010 spikes. Many of those who brushed aside the 2008 food crisis as a one-off event primarily driven by commodity speculation and panic among major rice-growing countries have started looking at the severity of future global food insecurity.

Unlike in 2008, when rice significantly contributed to the food crisis, the current crisis has been the handiwork of many other commodities such as wheat, maize (corn), soybeans, and sugar, as well as fruits and vegetables. So far, rice prices have remained relatively stable, with only a 17% rise between June 2010 and February 2011 compared with the prices of other field crops that have gone up by approximately 50–150%.

Among the major cereals, the wheat price more than doubled and the maize price increased by more than 90% during this period. The prices of other field crops such as sugar and cotton have also witnessed a significant rise in prices, with an 80% and 150% increase, respectively, during this period. The main reason behind the hefty rise in prices of these commodities can be traced back to supply losses brought about by the extreme weather conditions in different parts of the world.

Between May 2010 and February 2011, global grain production was revised downward by 81 million tons because of bad weather in the major growing regions. For example, severe droughts in Russia, Ukraine, and Kazakhstan, and floods in Canada and Australia, have significantly lowered global wheat production this year by more than 35 million tons relative to what was produced last year. (See Global wheat markets in turmoil: What does this mean for rice?)

Although rice production for 2010-11 has decreased by 10 million tons from what was expected early in the season because of floods in Pakistan and in some Southeast Asian countries, still, global production for 2010-11 is estimated to be slightly above 450 million tons, that is, 11 million tons higher than the previous year’s production.

The rising demand for grains—for both food and fuel—has also put additional upward pressure on food prices. For example, the share of maize used for ethanol production in the U.S. now accounts for nearly 40% of total production.

This means that 125 million tons of maize are now diverted from food to fuel. Meanwhile, the consumption of food grains (wheat and rice) has been strong, with a 72-million-ton increase from 2005 to 2010 as compared with the 33-million ton increase seen from 2000 to 2005.

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