A rice cartel may not be a bad idea in the long run

G. Panicker, Business Times 13 May 08;

PREDICTABLY, talk of a rice producers' cartel has been howled down. The Thai proposal produced a huge backlash from importing countries such as the Philippines. But while the proposal was untimely amid global anguish about high prices, it should still serve as a wake-up call to importers.

Thailand's Prime Minister Samak Sundaravej had said that the five rice producers in South-east Asia had agreed to form a grouping to cooperate on fixing international prices. Being the largest exporter with about 10 million tonnes a year, his country is in a pivotal position to influence the working of such a cartel.

Vietnam, which exports five million tonnes, did not publicly back the idea. The other members of an 'Organisation of Rice Exporting Countries' (Orec) would be Laos, Cambodia and Myanmar. The cartel idea has been put in the freezer for now, but consultations will continue, its proponents say.

Asia accounts for the bulk of the world's rice trade. India and China grow half of the world's rice but are small exporters. South-east Asia, producing 60 million tonnes of milled rice annually, claims 14 per cent of world production and 40 per cent of exports.

Unlike other staples such as corn, biofuel production has been only an indirect factor in the rise of rice prices. The tripling of rice prices over the past year has essentially been driven by strong demand, supply worries, hoarding, speculative commodity trades as well as export bans by some producers.

The idea of a cartel may be anathema, particularly when prices are this high. The World Food Programme recently termed the general rise in food prices a 'silent tsunami' that could drive some 100 million people to the brink of starvation. For poor people in developing countries, expenditure on food accounts for a substantial part of income. These people need help.

Some relief from high prices will come with increased production. But a growing and increasingly affluent population will demand ever more staples, which will continue to add pressure on prices. Climate change and lack of water will exert further pressure.

While prices are a good motivator for Asian farmers to increase production, they also need other incentives and assistance. Mechanisation can also help increase production but a major drive to mechanise is unlikely to materialise when countries fear that this would displace millions of farm workers - which it would.

Cartels are considered passe these days. But the success of oil producers may have been too appealing for the rice producers not to attempt to emulate. Mr Samak, however, was quick to say the grouping would not work like the Organisation of Petroleum Exporting Countries (Opec).

In fact, oil prices, having grown 11-fold in the past decade, have had a dramatic impact on input costs for the farmers. 'With the oil price rising so much, we import expensive oil but sell rice very cheaply and that's unfair to us and hurts our trade balance,' a Thai government official said as the reasoning for the aborted move.

Indeed, a rice cartel cannot work like Opec. Oil is a finite resource and producers have just their diminishing reserves underground. Rice production, by contrast, is renewed annually and is at the mercy of the weather. So it will be difficult to control production as the Opec's 13 members can do relatively easily by turning off their taps to enforce a collective output decision.

Still Opec, which supplies 40 per cent of the world's oil, has shown how prices can be driven up. Further, the oil cartel has begun to inspire gas producers such as Russia and Iran to contemplate a similar grouping to ensure better prices.

So, a rice cartel will have to overcome competing commercial interests and differing economic policies. It will also face stiff opposition abroad, particularly from the United States, and major importing countries. But the oil grouping also faced similar problems. Yet, it focused on its own economic interests and thus gained its pre-eminence in the energy trade.

Any grouping that ensures a fairer return to farmers should be welcomed in the long-term interests of the consumer. A rice cartel will force countries with arable land to respond to this current wake-up call and reduce import dependence and step up production in innovative ways. For instance, China is trying to expand the cultivation of aerobic rice, which like wheat grows in dry soil conditions and also to grow food abroad. Such initiatives, if multiplied across rice-growing nations, would be both pro-farmer and pro-consumer.

A rice cartel may thus turn out to be a blessing in disguise.

The writer is with BT's Foreign Desk