Rice Farming

 - Rice Producers Forum -

How the economic crisis
affects the rice industry

By Thomas Wynn
Director, Market Development
USRPA

In recent times, the news headlines have been full of reports regarding the pending financial crisis and its effects on different industries. One area that has been surprisingly blank has been the impact on the commodity industries, specifically rice.

In these trying times, it is important to examine the effects of all events before making any decisions.

The rice industry works on both supply and demand. Historically, demand has driven the market and has dictated price. This changed in the past two years into a supply driven market where producers were able to receive the prices that were more favorable to them as opposed to what the buyers wanted to pay.

When the financial crisis hit in late September, this trend seemed to stop in its tracks as the market fell off substantially. Some reasons why this is not a sustainable trend are that rice is the cheapest way to feed large masses of people, production area has fallen into intense competition with other crops and the supply/demand situation has yet to reach an agreement on quantity and price.

Positive effect of financial crisis
Rice is the staple food for over two-thirds of the world’s population. With the onset of the financial crisis, the people who depend on rice as the staple food were suddenly able to purchase more food for the same money. This looks good on the surface so long as you are not a producer. What is not publicized is that these people now must compete with other individuals who lost their job or substantial portions of their income and must now depend more heavily on rice as a part of their diet because rice is the cheapest form of carbohydrate on the market.

This situation is magnified by the government actions that attempt to alleviate the food shortages in their countries. When rice is the best buy, then rice is the commodity purchased. In short, the financial crisis has actually INCREASED the global demand for rice.

Potential reduction of rice supplied
Another point to consider is that production area for rice has not substantially increased over the past decade – not nearly as fast as the population growth curve. With rice operating in a short supply situation, the obvious solution is to increase production.

This is not as simple as it sounds.

Agriculture takes about nine months (one growing season) to re-adjust production. Even if the incentives (price) were there to increase production, it remains limited by the amount of viable land. Rice is one of the most resource- and labor-intensive crops in the world. It requires substantial amounts of water, fertilizer, fuel, as well as employee hours. With three-quarters of the inputs at the mercy of the market (water, fertilizer and fuel) and potential sustained decreases only in the labor area, it is very difficult for growers to manage long- term risk. Without the guarantee of a profit, producers will turn to more profitable or less risky production alternatives. What this tells us is that the economic situation could potentially REDUCE the amount of rice supplied.

Supply and demand vs. market psychology
As most marketers are quick to agree, fundamentals are much stronger than technical factors. What this means is that when the supply and demand dictate things, it is a much more powerful force than market psychology (although very often the psychology is parallel to the fundamentals). Unfortunately, the economic crisis has put the psychology in front of the fundamentals, taking the market in a COMPLETELY different direction than what is indicated. When the fundamentals take back over, the adjustments will be fast and severe and will make major changes in the rice world.

The global situation has had many effects on the global marketplace, and the rice world is no exception. In some cases, it has been good for the market, while in others it has not been so kind. At the bottom line, however, the net effect should be positive. While there are many shifts taking place, the downward push in the rice industry cannot be maintained unless most other aspects are changed significantly.

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