Food Prices in Asia: Is there a Coming Crisis?

Karen Palmer: Welcome to today's discussion on Food Prices in Asia: Is there a coming crisis?

Karen Palmer: I'm your moderator, Karen Palmer. Joining us today is Giap Minh Bui, a Natural Resources and Agriculture Economist in ADB's Southeast Asia Department, and Lourdes Adriano, ADB's lead agriculture specialist, who recently coordinated the publication of four papers produced out of the ASEAN Rice Trade Forum.

Karen Palmer: The working papers suggested ASEAN nations can help avoid world rice price shocks by reducing export restrictions, placing less emphasis on self-sufficiency, and expanding coordinated rice policies with India and Pakistan. They also advocate for a regional rice commodities exchange.

Karen Palmer: Stability in the rice market is particularly crucial given the expected impact of drought and reduced rains in major grain-producing countries like the U.S., Ukraine and Russia.

Karen Palmer: We have received numerous questions submitted by email, so I apologize in advance if time does not allow us to answer them all. I'd like to open today's discussion with some of those questions.

Karen Palmer: Gilbert Emano, a BS Economics student from the University of San Carlos, in Cebu City, the Philippines asks: If there is food shortage and if this food shortage is going on at a faster rate, will agriculture type of business such as farming of rice, corn and other food agricultural farm products be profitable in the coming years, especially in the Philippines? If so, when exactly will it happen?

Lourdes Adriano: Farming becomes profitable if farmers have access to appropriate inputs (such as fertilizer), technologies, and market information. But aside from the returns-costs factor, there are also sectoral and macro policies that need to be in place. For example… Farmers will need to access markets, but with poor farm-to-market roads and poor storage facilities, they will lose a lot. Macro policies involve fiscal measures where governments spend on production (e.g., irrigation) and market infrastructure (e.g., roll-on, roll off port facilities) and provide enabling policies for farming to become a profitable venture (e.g., sea transport regulations in the Philippines are so prohibitive that it is less costly to transport corn from Thailand than from Mindanao), or enabling farmers to have the choice to produce crops that will generate them more income.

Karen Palmer: A follow-up from Mr. Emano: If not, what industries or development ideas should we focus on to combat this drastic phenomena of shortage in food supply and rising prices, which in turn would be profitable for the small and medium enterprises to be engage in?

Lourdes Adriano: Development of food chain logistics - linking farms to processing/storage to markets (domestic and foreign); ensuring efficient use of our water and land resources for sustainable production; reducing waste and losses at every segment of the food chain; AND improving access to SAFE and NUTRITIOUS food to the poor and vulnerable (for example, through conditional cash transfers, targeted food safety nets)

Karen Palmer: Dipayan Bhattacharyya asks: What can net staple importing and exporting countries do differently this time, based on experience and lessons learned from the 2008 crisis?

Lourdes Adriano: Countries can get together and collectively agree on coherent trade policies. For example, the ASEAN +3 rice market has the largest exporters (Thailand, Viet Nam), the world’s leading rice importers (Philippines and Indonesia), and major game players (PR China, Japan, S. Korea). If they agree not to unilaterally promulgate export bans or import tariffs, and instead come up with institutional arrangements for forward contracts of rice, the rice trade would be "thicker" and prices more stable. ASEAN can also bring into the discussion other South Asian rice players, such as India, Pakistan, and Bangladesh.

Karen Palmer: Dipayan Bhattacharyya also asks: With other commodity prices rising, some countries once again may press the panic button, leading once again to a global food crisis. What can big players like ADB and the World Bank lobby for -- and do -- in order to prevent such drastic behavior that may drive food prices up further?

Lourdes Adriano: World Bank goes for global collective action (e.g., G20); ADB advocates for collective coherent food trade policies at regional levels – ie ASEAN, South Asia Association for Regional Cooperation (SARC), Central Asia Regional Economic Cooperation (CAREC), and Greater Mekong Subregion (GMS). More than regional cooperation, we invest in productivity measures in every segment of the food chain (ensuring less wastage per drop of water and hectare of land used).

Dipayan Bhattacharyya: ASEAN can this time play a very proactive role in terms of open trade and thereby can send a clear signal to the world on its role as a major player in stabilising food prices.

Philip Heijmans: Hello, I'd like to ask the panel the following question. Would you say that Cambodia is less prone to global shocks than its regional neighbors since food consumption is more or less self-sustaining in a majority agrarian society? Inflation in Cambodia is much lower than others at between 3-4%. Nevertheless, there was a case in 2008 where inflation reached over 20% because of petrol and local food prices. Does the possibility for a repeat remain today? How much can the global economy truly affect Cambodia? Many thanks.

Bui Minh Giap: Cambodia is self-sufficient in rice but the fragmentation in the rice value chain, plus the lack of the associated infrastructure, are the major bottlenecks. Yes, Cambodia will be affected by the price shocks as it is strongly linked to supplies in Thailand and Viet Nam.

Karen Palmer: Banikinkar Pattanayak, Assistant Editor at The Financial Express, asks: Do you see a reduction in Indian grain and sugar supplies in 2012-13 due to poor monsoon rains?

Lourdes Adriano: Yes, according to the Int'l Food Policy Research Institute office in Delhi. This office notes food grain and oilseed production in India could fall up to 12% this year as a result of poor rain. While there will be decline in production, the drought is not likely to result in widespread shortage as India has stockpiled more than 76 million tons of wheat, rice and other grain in storage, in part because of government support for those crop.

Karen Palmer: We had numerous questions submitted regarding pursuing goals of rice self-sufficiency, particularly in the Philippines. Erik dela Cruz of Thomson-Reuters asks: Can the Philippines really achieve rice self sufficiency by the end of 2013? If no, then why not?

Bui Minh Giap: No, the target will not be accomplished. It is the lack of productive infrastructure that are in operation. Resource costs for rice production seem much higher than neighboring countries such as Viet Nam, Thailand and Cambodia. A large part of productive labor works overseas. Despite recent progress, land reform measures have been far from successful. Therefore there has been insignificant private/household investment in on-farm productive infrastructure.

Karen Palmer: Khamla Phanouvong asks: What’s the best way for Lao PDR to cope with food prices crisis? What is a suitable policy for Lao PDR to do?

Bui Minh Giap: In the short run, the Lao PDR government should rationalize the contract farming practices and land concessions to ensure the crop value is retained in the country and land resources are properly utilized, particularly the northern upland region. In the medium and long terms, the government should adopt a systematic land use planning to clearly identify production zones for various crop to enhance productivity. Regional and sub-regional planning is also needed to ensure balanced production and distribution of staple food. The investment plan for the sector prepared by Ministry of Agriculture & Forestry is ambitious and relies heavily on foreign direct investment, which will not come soon without investors seeing the profit in the short run. In this regard, there should be a clearly phased and budgeted development plan for crops in various regions.

Frank Fu: How will rising food prices affect China specifically?

Lourdes Adriano: Rising food prices will impact PR China through higher food inflation as about a third of their Consumer Price Index is on food expenditures, but there is usually a lag of 6-7 months before higher inflation kicks in. For this year, prices for rice and wheat are fairly stable. PR China has also got huge stocks precisely to ensure that prices will not be volatile.

Lourdes Adriano: PR China imports maize and soybeans from the US but it has alternative sources, hence may not be significantly impacted by the severe drought that affected the maize and soybean production of the US.

Wyle Layaoen: Good afternoon, do we have any estimates/forecasts on how much prices will go up due to the ongoing weather-related disturbances in food production?

Bui Minh Giap: It is not straightforward to estimate percentage changes in rice price off-hand as it is geography-geographic and temporal. The forecasting model often works with a series of factors.

Karen Palmer: John Bertelsen asks: With India, Viet Nam, Thailand the world's biggest rice exporters, and a newly resurgent Myanmar expected to join them, exporting 1.5 million tonnes in 2012, do you expect a rice shortage?

Bui Minh Giap: This question might have been referred to increase in supply, not shortage. Pls clarify.

Lourdes Adriano: You mean rice surplus. For perceived shortages, climate change is the big X factor. Extreme weather like severe drought or flooding can reduce supply immensely. That is why it is important that countries invest in two areas now: 1. increased productivity from the farm to each segment of the food chain; and 2. resilience measures that make farms/food supply chain capable of responding to natural (supply shocks) and economic (price volatility) shocks

Karen Palmer: A question from Maricel Solatre: How can ASEAN be less vulnerable to price shocks for maize, soybean and wheat? Does it need to establish a regional emergency reserve, just like for rice?

Lourdes Adriano: No. Rather, ASEAN countries should invest collectively in improving the food chain logistics intra-regionally. This would be in the direction of a one ASEAN by 2015.

Philip Heijmans: Thank you. I'd just like to follow up regarding Cambodia. I'd just like to add that even though recent data reflects high petrol and food prices inflation nevertheless remains low. Could you be more specific about how the country could be threatened by price shocks? What infrastructure/regulations does it require to quell any threats?

Bui Minh Giap: Price shocks are mainly localized due to the inefficiency and bottlenecks in distribution. The external shocks normally happen whenever Viet Nam and Thailand have them due to the fact that Cambodia has been exporting paddy rice (rather than milled rice) to these two countries due to a lack of post-harvest infrastructure and high costs of energy and transportation. Solution: set up the milling and related facilities to retain paddy and its value addition in the country.

Sameer Mohindru: I have just two queries, one on impact of Thailand's domestic rice import program on global supply and the other on the role of India's rice and wheat exports in mitigating price rises. Sameer Mohindru/Wall Street Journal

Lourdes Adriano: I think you mean the Thai pledging program, which means the government is giving a higher-than-market price to its rice paddy farmers. As Thailand is one of the leading world rice exporters, it means a reduction from the already thin global rice trade of about net 3 million tons, depending on how the Thai government deals with its accumulating stocks. Rice prices would have jacked up steeply were it not for the decision of India to remove its export ban on non-basmati rice. This compensated for the reduction in Thai exports. Additionally, Viet Nam and Pakistan exported rice, staving off the pressure on the price of global rice to increase substantially.

Guest: This is Chanyaporn Chanjaroen from Bloomberg. With record grains prices, do you see any impacts on demand at all? From your previous answers, China and India seem to be covered because of stockpiles. Do you see any other regions/countries vulnerable to shortage/food price spikes? Thank you.

Bui Minh Giap: Northern region of Lao might be vulnerable to food insecurity and price shocks due to the inefficiently managed land concessions and contract farming practices.

From Twitter: Aftab Alam Khan ‏@AaftA3 @ADB_Manila Do you envisage any possibility of export restrictions or bans from major exporters in Asia?

Sameer Mohindru: I think you meant 30 million and not 3 million tons net trade

Lourdes Adriano: The protracted monsoon is affecting the production of wheat, rice, and other major crops in India. There is to date no indication that India will impose another export ban similar to the 2007 and 2011 episodes. Depending on its present stockpiles, which are said to be huge, there is less pressure to impose these bans. However, things can change. We need to monitor this regularly.

Mike: How about food subsidies as an option? Developing countries (such as in Africa) who depend mostly on imported cereals are most exposed to the impact of more expensive food. People sometimes sell their assets just to buy food, and making them more vulnerable in the future.

Bui Minh Giap: Food subsidies are just temporary measures. In the longer term, stable employment has to be created to sustain household livelihoods. In a related context, it is a must to promote urban-rural linkages and balanced development.

Karen Palmer: Zamir Haris asks via email: Rainfall in Pakistan was less compared with the preceding year; has the Asian Development Bank made any estimates in terms of the fall in crop production and how that will affect the country's economy?

Lourdes Adriano: Sameer, I meant net trade of 3 million tons of Thai exports. The country on the average exports 10 million tons yearly. Plus or minus, with the pledging in place, it may be able to export around 7 million tons according to our projections using the Arkansas Global rice model.

Bui Minh Giap: Regarding Pakistan: Sorry, no. However, the government and the agriculture research institutes are now more technically capable to estimate production losses using remote sensing technologies and early warning systems. Food security is not just about availability. Equally important is access to safe and nutritious food, which can be facilitated through more intra-provincial trade and inter-country trade relations.

Karen Palmer: A follow-up from Ms. Solatre: What policy direction/strategy, in terms of food security or food sufficiency and trade do ASEAN regions need to adopt to avoid devastating effect of price shocks?

Bui Minh Giap: If they cannot concede to opening rice trade, at least agree not to unilaterally impose restrictions that only constrict rice regionally and globally. The next best option is to agree to discuss with multi-stakeholders like the ASEAN Rice Trade Forum. They should work for more transparent and real time market information. Also, share technologies and good agronomic practices that can help improve farm productivity and reduce losses and wastage. On the ASEAN Infrastructure Fund, it may be useful to earmark development of food logistics infrastructure and trade facilitation measures.

Sameer Mohindru: Today, the Thai government plans to announce more budgetary allocation for its rice pledging program. How long can it go on and on without selling the accumulated stocks. Will it hurt the Thai economy?

Lourdes Adriano: The Thai government is already trying to unload its ballooning stocks, estimated to be about 10 million tons. Recently, it tried to auction 753,000 tons of rice at higher–than-market price. This resulted to selling only about 250,000 tons.

Lourdes Adriano: The government may not be able to absorb more losses. It will need to think of innovative ways of unloading its warehouses, perhaps through more government-to-government contract arrangements.

Joseph: Do you think it is equally important to control or regulate the trade and prices of agricultural inputs (fertilizers, seeds, and equipment) because these will eventually affect the cost of agricultural products? If yes, how effective do you think this solution will be in addressing the increase in food prices?

Bui Minh Giap: Agricultural inputs market should be operated on a commercial basis to ensure competitiveness. The government should only regulate on foundation seeds and agro-chemical usage.

Karen Palmer: Tim Williams asks via email: During the previous food price spike (2007-2008) speculators took much of the blame. I was never clear how speculators could influence food prices since they generally do not take delivery of the product and, as the products are commodities, ultimately the product will find a price in the market based on supply and demand amongst consumers/ manufacturers using the commodity. To what extent does the panel believe that speculators are to blame for food price increase on this occasion? Is the impact of this negative or positive in that it sends signals to farmers to plant more commodity crops?

Lourdes Adriano: Many studies (e.g., World Bank and Int’l Food Policy Research Institute) showed that speculation did not play a significant role in the food price crisis of 2007-08. It was was a combination of low global food stocks, bad weather for some producing countries, and unilateral implementation of food bans (e.g., India and Viet Nam then), and import restrictions (e.g., Philippines auctioned for the highest rice price). Futures markets actually provide two major functions: price discovery, and price risk hedging tool.

Karen Palmer: Also from Tim Williams: The EU has been much criticized in the past for subsidizing food production and exporting below cost to poor countries, thus undermining domestic production. Should governments subsidize over-production to ensure there is sufficient buffer stock? What should they do with this over production in good years?

Lourdes Adriano: Trade them; the more buyers you have, the better for the producing countries. And trade them regularly and consistently, not on an off-on basis. The latter induces uncertainty and price volatility.

Karen Palmer: Gerard Reijn sent many questions. Among them: In Asia the main food is rice, and rice is not hit by the drought. How do droughts in grain-countries like US and Russia influence food prices in the Philippins and Viet Nam?

Lourdes Adriano: Indirectly, as the Philippines and Viet Nam are major importers of wheat for flour and also corn for feed. However, both countries have other sources, and wheat and corn imports are not as inelastic.

Karen Palmer: A follow up: Is the production of biofuel a problem? Is land use for biofuel a real competitor for food?

Lourdes Adriano: Biofuel production is not a problem, but a choice for farmers. Under normal market conditions, if biofuel production assures farmers a higher price than in farming rice for example, it will compete for food production. That is why it is essential that each country aims for high productivity using scarce resources like water and land, and coming up with appropriate land use policies and regulations that take into account the increasing linkages of food, water, and energy.

Karen Palmer: Just advocating for keeping markets open and allowing free flow of commodities may not work -- what are some "out of the box" solutions to rising prices? What sort of mix of short, medium and longer term vision and corresponding resources are needed to address this potential crisis in an effective and sustainable manner? This is a question from Dipayan Bhattacharyya via email.

Lourdes Adriano: For the SHORT to MEDIUM: (a) Re-think the concept of reserve management. It is futile if we go against the political tide of governments going for self-sufficiency and increasing buffer stocks. Transparency and good governance in reserve management together with the private sector playing a role in reserve management (a la Singapore) may be the second best option. Complement this with regional reserve management (like the ASEAN +3 emergency rice reserve system and South Asia food bank). (b) ASEAN ++ dialogues/forums for collective and coherent price policies. With the demise of the DOHA round, regional action may be the way to go. (c) More risk management tools, such as a weather based-index, rethink warehouse receipts and a local commodity exchange. SHORT TO LONG TERM: Invest now for the future by building efficient food chains through economic clusters (e.g., Greater Mekong subregion to invest on rice food chain with Myanmar and Cambodia at the farm production end, Viet Nam and Thailand for the processing and marketing infrastructure.) Bring in Singapore to serve as food financial center hub and/or R&D hub. Tap Australia to become a player on regional food reserve.

Karen Palmer: Erik dela Cruz of Thomson-Reuters asks: How serious is rice smuggling in the Philippines? Does ADB have any estimates on the average annual volume of smuggled rice entering the Philippines and where the grains usually come from? Are Philippine authorities' doing enough to stop this?

Bui Minh Giap: There is no problem with rice smuggling in the Philippines.

Karen Palmer: Dr.Yong Tang asks: A large number of Chinese non-genetically modified soybean prices continue to rise and are exported into US and some other countries. Largely what is the reason ?

Lourdes Adriano: Non-GMO soybeans are sold at premium prices given the demand for these in foodstuffs (i.e. soymilk, soy sauce, etc.) in Asia and inputs in feeds in Europe where there is a growing demand for meat fed with non-GMO soybeans.

Karen Palmer: Dr. Yong Tang also asks: In addition to the weather what is the main reason of non-genetically modified soybean price rises?

Lourdes Adriano: Other major soybean producers such as Brazil and Argentina have increasingly been using GMO soybeans given their higher yields. Given the prevailing higher prices, the use of GMO soybeans is expected to further increase in these countries to take advantage of lower production from the US as a result of higher yields. This may likewise lower non-GMO soybean production worldwide.

Karen Palmer: Unfortunately, we have run out of time. Thank you for participating in this online chat. We will post the transcript in adb.org.

Bui Minh Giap: Thank you everyone!

Lourdes Adriano: Thanks everyone for the interesting questions!