Sunday, April 27, 2008

Ricing Frustrations: Follow-Up

The pace of the increase in the price of rice has gone from a wok to a run since last fall. Brazil, Egypt, Vietnam, Cambodia, and Egypt have placed restrictions on rice exports. Other countries such as China are imposing punitive tariffs, and still others have begun stockpiling. Even Sam's Club and Costco have started limiting rice purchases. If the cost of water wasn't so expensive in my town, I'd be turning my yard into a paddy field.

It's difficult to really know the extent of the rice shortage because of the stockpiling and hoarding that is occurring at the country and individual level. These actions serve to drive up the near-term demand for rice which leads to higher prices which leads to more hoarding.....

As I wrote in the original "
Ricing Frustrations" post:

Clearly, demand has been outstripping supply (as with many commodities). The key will be to look for the inflection point. There's a huge incentive these days (where prices are not constrained) to put even marginal land back into farm service. Pests, disease, and weather are always wild-cards, but the incentive to plant is there.

From an article in today's The Times of India:

Thailand's Prime Minister Samak Sundaravej promised Sunday that the kingdom would not cut rice exports, as soaring prices of Asia's staple grain continued to fuel concerns of a shortage.
Samak said in his weekly television address to the nation that there was plenty of rice in Thailand, the world's biggest exporter.
"Thailand will not announce a ban on rice exports. It would destroy our reputation," he said.
He explained that farmers were now planting five crops in two years -- up from the traditional two crops per year -- to ensure they met demand.

This is precisely the type of action we should expect to see with rice prices hitting record levels. More land will be put to agricultural use, and crops will be planted more frequently (which could have longer-term soil productivity implications).

Rice is a staple of nearly 3 billion people. Governments may tinker with education, health care, business incentives, and tax policy, but food is the most basic human need. If you can't feed your people you won't remain in power, so there's a strong incentive for governments to try and address this issue. We can expect to see more and continued export limits, price caps, farming incentives, rationing, tariffs, land conversion programs, etc. Some of these policies (such as price caps and higher export taxes) will impede the development of new supply but others (such as land conversion and farming incentives) will encourage development. Some countries will get it wrong, and others will get it right.

the natural forces of supply and demand will correct this rice crisis. We'll see new supply coming from countries which aren't limiting exports or prices. Hoarding will diminish. People will substitute Smores for Rice Krispy treats. We'll see more bubble blowing than rice throwing at weddings.

From an investment perspective, no one knows how high rice prices will ultimately go, but you can be sure that market forces are currently unfolding and sowing the seeds of a future sharp correction in the price of rice.