Staple food must remain stable to prevent world ‘paddy’

With food prices increasing significantly in September, Fiona Bond asks if rice will curry favour with traders

The recent drought in the United States and the ensuing shockwaves through the grains market has thrust the spotlight back on to global food prices.

Corn and soybean prices hit new records in August, while wheat rallied to a 17-month high amid fears for supply.

As a result, world food prices increased by 1.4 per cent in September, according to the UN’s Food and Agricultural Organisation, prompting concern about possible food shortages and spiralling inflation. But amid the doom and gloom, rice has brought some much needed respite.

Despite fears that the rice crop would be affected by drought this year, both India and Thailand have produced ample supplies, helping to keep prices remarkably stable.

India’s rice crop is expected to be just shy of the 104 million tonnes achieved in 2011, while Thai exports of rice in 2012/13 are forecast to be some 20 to 40 per cent higher than the latest estimates for 2011/12.

Rice will remain in abundant supply globally, while import demand remains weak and competition among exporters intensifies

Ross Strachan, commodities analyst at Capital Economics, says he expects rice to remain in abundant supply globally, while import demand remains weak and competition among exporters intensifies.

That said, the threat of volatility is never far away; natural catastrophes, civil conflict and rising affluence across the East have all played havoc in the past, and could alter the supply and demand dynamics going forward.

In 2007/08, the world witnessed a food crisis which threatened to plunge more than 100 million people into extreme poverty.

The price of rice, a staple in the diets of nearly 50 per cent of the global population, almost doubled on international markets in a matter of months, raising fears for civil unrest, and causing political and economic instability.

Kathleen Brooks, director of research at Forex.com, says we cannot discount rice growing in popularity across commodity markets in the future.

She explains: “If corn and wheat prices were to rise significantly once again, there is a very real chance that rice would be viewed as an attractive alternative.”

With growing interest, both from a consumption and financial perspective, comes rising prices and if this were to happen again, it would have a devastating effect on the emerging economies.

“Hunger is a very real issue; a higher price for staple foodstuffs would spell bad news for emerging markets such as India and Western Africa. They would likely raise subsidies in response to rising costs, which in turn would slow economic growth,” she warns.

Ole Hansen, head of commodity strategy at Saxo Bank, echoes this sentiment. “At the moment, we are experiencing a rice glut but, if this were to alter, the socio-economic impact would be deep and far-reaching,” he says. “Most notably, it would result in a rise in inflation. We are already seeing the likes of China slowing, and this would be accelerated and mirrored across the developing markets.”

In order to contain inflation, governments would be prevented from easing their monetary policies.

He says: “At present, Asia accounts for roughly 60 per cent of total global growth, and the rest of the world relies heavily on Asian social and economic development.

“Were this growth to halt as a consequence of rice prices and resulting inflation, it would have a detrimental effect across the entire globe.”