In recent years, rice has emerged as an agricultural commodity with a reputation for relatively stable prices, when prices of most other agricultural products have been anything but.
The main reason for this is the peculiar makeup of the rice market and how the international trade of the product is dominated by one actor in particular – India.
Although Indian rice comprises approximately 40% of the global rice trade, rice exports are still very much an afterthought in the Indian rice market. This is because only around 15% of Indian rice output is exported, with pricing trends in the country – and therefore the global rice market – defined by Indian government policy.
The Food Corporation of India is responsible for procuring food, including rice, wheat and other agricultural products. It sets minimum support prices at which it will buy agricultural commodities from farmers. The prices are based on the cost of production, including fertilizers and labor. MSPs are set annually for each commodity that the FCI procures, typically prior to the start of planting.
MSPs become de facto price floors in these markets. If domestic prices fall below the MSP, the government will buy all supply until prices rise above it. Naturally, this means that India has become one of the world's largest stockholders of various agricultural commodities, especially rice.
According to the US Department of Agriculture, India held 42.5 million mt, or 23%, of global rice stocks at the end of 2021. China is the only larger stockholder, with 59% of global stocks. China has long been the largest holder of stocks of rice, wheat and many other agricultural commodities, but its relatively small rice export volumes mean that it does not significantly influence international rice prices.
While India's population is tipped to overtake China's in 2023, the Indian government does not place as much importance on having high stock levels. Due to the MSP scheme, this creates pressure on the government to release stocks.
The Indian government uses procured stocks to run its public distribution scheme, which supplies grains and other commodities to economically disadvantaged members of the population at subsidized rates. In addition to this, the government runs its Open Market Sales Scheme, by which it releases excess stocks onto the market at predetermined prices to increase supply and control price rises.
The overall impact of these policies is that the Indian government can keep domestic prices loosely within a band of its choice. However, and despite efforts to stop it from happening, white rice from these schemes leaks into the export market. As a result, Indian government subsidies are passed onto the international market.
This control on prices is made abundantly clear when looking at the latest data from the Food and Agriculture Organization of the UN's Rice Price Update. India has minimal role in the Japonica rice market and produces Indica rice almost exclusively. While there is a pricing relationship between the two markets, they are distinct. Between July 2021 and July 2022, the FAO's Japonica sub-index rose by 24%. In comparison, the global Indica sub-index rose by only 2.2% over the same period.
This is mirrored in the price volatility of assessments by Platts, part of S&P Global Commodity Insights. Indian 5% broken white rice has been assessed in a range of $329-$415/mt FOB between August 2021 and August 2022. In comparison, Platts benchmark Californian Japonica assessment, US #1, 4% broken white rice has ranged between $840/mt and $1,540/mt FAS FCL Oakland over the same period. Taking the comparison even further, Platts assessment of Black Sea wheat (Russian Deep Sea, 12.5% protein) has varied from $208-$455/mt FOB over the same period.
Most major wheat exporting countries, on the other hand, do not have significant procurement and centralized stockholding schemes.
Russia accounts for almost 20% of global wheat exports, yet its stock levels fluctuate considerably as the government typically does not accumulate stocks or try to control local prices. The lack of centralized stocks mean that farmers and private firms individually make stockholding decisions and there is no coordinated action on a national scale to mitigate supply shocks which can lead to price volatility.
Furthermore, wheat stocks globally are significantly more spread out across regions than global rice stocks. While China still commands the majority of wheat stocks, the remainder is spread more evenly across a larger number of countries, and Russia only holds about 4% of global stocks. This means that no one country can saturate the international market by offloading stocks. And while only around 10% of rice output is traded internationally – with India being such a dominant figure – approximately a quarter of wheat is traded internationally.
This comparison is even starker when looking at stocks-to-use. It is generally agreed that there is a close correlation between price volatility and stocks-to-use ratios, which are a measure of supply tightness as stocks are an important device for mitigating supply shocks. For any commodity, prices tend to be highest when the stock-to-use ratio is lowest.
Rice has had a significantly higher and more stable level of stocks-to-use over the last 10 years, according to data from the FAO, compared with a relatively volatile wheat ratio. One of the main reasons for rice's price stability has been such consistent stocks in the market's main exporter for most of this period – India.
Demand for agricultural commodities is derived from the demand for their uses. While human consumption generally rises at a stable rate, the same cannot be said for other uses. In particular, demand for biofuels has experienced a more turbulent rise. Corn is a product very commonly used for biofuel production, with roughly 40% of US corn output used to produce ethanol.
On a regional and international level, biofuel demand has shown considerable volatility in recent years. This translates into varying levels of demand for corn to produce biofuel, which, in turn, leads to volatility in corn prices.
Corn and soybeans especially are also a heavy component of the animal feed industry, exposing these commodities to price fluctuations in this sector. While demand generally grows steadily – as with human consumption – it is also exposed to occasional dramatic variation, such as through animal culls. For example, China cut its hog herd by around a quarter in 2019 in response to an outbreak of African swine fever and this weighed heavily on corn demand.
While rice has been an increasing alternative source of animal feed in the past year due to spiking prices of other agricultural commodities, feed demand remains a small portion of rice consumption. Without much variation in uses, rice benefits from having its main demand come from human consumption, which follows a largely smooth and modest growth path.
India remains key to rice price stability in the short-term due to its steady stock releases and unrivalled position as the world's rice basket. However, given the Indian government's Sept. 8 decision to ban broken rice exports and impose a 20% tax on white rice exports, rice's reputation of price stability is under threat.
It is too soon to ascertain the full impact of these recent measures, and to know how long the government will implement them. Logic suggests that when the likely output of the main crop becomes clearer in Q4, the government will re-examine the situation. Until then, we may see increased volatility in the international rice market, particularly for Indica varieties.
With reports from Arham Khan