Options for managing rice price volatility: stock and trade policies

Agricultural Development Economics Division (ESA)Food and Agriculture Organization of the United Nations

Options for managing rice price volatility: stock and

trade policies

David Dawe, FAOBangkok, 22 September 2015

Bangkok, Thailand, 22 September 2015 2Regional Office for Asia and the Pacific

Food and Agriculture Organization of the United Nations

Recommended by most economistsRemoves market distortions, although

this is disputed by some economistsPolitically problematicExamples: none for rice in Asian

countries with agricultural sectors

Stock and trade policy options

Free trade



All Asian countries want to stabilize rice prices to at least some extent.

Is the objective to stabilize prices or to raise the price to farmers?

Need to clarify the objectives of any stock/trade policy



Domestic and world prices in Indonesia, 1969 - 1996

It is possible to stabilize rice prices



Domestic and world prices in Indonesia, 2004 - 2015

But rising rice prices are becoming common



Trade and stocks need to work together.A stock policy will not work in the absence

of trade controls.Emphasis should be on trade as much as

possible because stockholding can be expensive, but stocks also have a key role.

Historically, importing countries have used stock policies, but not exporters.




Domestic and world prices in Thailand, 1953 - 2000

Most Asian countries desire stable rice prices



Complete price stabilization is very expensive and probably impossible; prices must decline at the harvest in order for traders to have an incentive to store.

Must consider both domestic supply fluctuations/shocks and world price shocks.

A comprehensive price stabilization policy will need supportive trade policy.

Need to clarify objectives



Stocks have a bigger role to play in importing countries.

Rice importers tend to raise the level of domestic prices above world prices.

Rice exporters tend to lower the level of domestic prices below world prices.

These patterns occur because they result in revenue for the government.

Stock and trade policy

Options are different for exporters and importers



Retail rice prices in several Asian countries



If the objective is to raise price to farmers permanently, this will be very expensive to the government in an exporting country.

If this option is pursued, fewer funds will be available to improve productivity. Many countries fall into this trap, Thailand being a prominent example.

Costs of raising prices



But there are also costs to an importing country in allowing higher rice prices.

Costs typically include more poverty on balance; less crop diversification; poorer nutrition; more imports of alternative cereals such as wheat; less competitiveness in labor-intensive industries.

Costs of raising domestic prices



Should supplies be purchased from farmers or traders?

Both Indonesia and Bangladesh experimented with procurement from farmers, but eventually moved to procurement from traders due to lower transactions costs. If markets are working well, this will benefit farmers. If markets are not working well…

How to conduct/improve stock policy?



What should the stock level be?In Bangladesh, stock levels typically vary from 1

to 3 percent of domestic production over the course of a year.




Govt. rice stocks as % of apparent consumption

Bangladesh1976/77 – 2012/13



Govt. rice stocks as % of apparent consumptionPhilippines

1975 - 2014



How long should stocks be held?The answer depends on the objective. If the

objective is to reduce normal seasonal margins, then stocks should never be held more than a year.

If the objective is also to reduce inter-annual price fluctuations, then stocks may need to be held for more than a year.




Who should stocks be sold to?Probably they should just be sold into the

domestic market. Traders can then decide what to do with them.

If stocks are sold with the stipulation that they be exported, this will conflict with WTO rules if purchase price was greater than sale price.




Can the government consistently make money by buying low and selling high?

In my opinion, this is overly optimistic. If prices are rising, then yes, but if prices are falling, then there will be losses.

How to deal with the politics of selling at a loss? If this option is not considered, then stocks can be held for a long time.




If there is no stock policy, can objectives be achieved with a variable export tax/import tariff?

Would provide revenue to governmentWould provide price stability to allWould affect the level of rice prices

Arguments against stock policy



Can be done according to a pre-determined schedule or ad hoc

Examples: Rice in Thailand from 1955 – 1985 (in conjunction with quotas); Indonesia for crude palm oil

For importers, use of a schedule is not WTO compatible.


Use taxes to stabilize prices



Most likely needs to be done on an ad-hoc basis; initial estimates of quotas will need to be revised based on the size of the crop and changes in world prices

Tends to create rents for individualsExamples: Thailand for rice from 1955 –

1986; Viet Nam for rice


Use quotas to stabilize prices



Thank you for your kind attention

Education

Options for managing rice price volatility: stock and trade policies