The lure of the international market
Last week, India imposed an export duty of Rs8,000 a tonne on basmati rice with a view to discourage its exports and bolster domestic stocks to meet any eventuality. This, says a top Indian industry official, is likely to “benefit farmers in Pakistan” in a big way. It is estimated, according to him, the export duty would ultimately “transfer Rs 3,000-crore worth of Indian farm income to Pakistani farmers.” This appears to be an exaggerated estimate mixed up with an expression of anger over the huge export duty but also indicates the losses Indian trade may suffer.
New Delhi has also lowered the minimum export price (MEP) on basmati from $1,200 to $1,000 a tonne. “Lowering MEP does not make fiscal sense as Pakistan MEP on basmati ($1,300) would help them gain the Gulf market,” says Anil Mittal, chairman of KRBL which sells basmati under the ‘India Gate’ brand. But how far Pakistan, the fifth biggest exporter, can benefit from the situation and rush to occupy the space being vacated by its neighbours is difficult to predict. .
These are extraordinary times of scarcities and every rice-growing country is building up reserves to meet local needs first and for this purpose has placed ban or curbs on exports. Pakistan’s current rice production is estimated at 5.5million tonnes, of which two million tonnes can at best be exported but exporters are already determined to make a kill by selling at least 2.8 million tonnes.
India exports over 80 per cent of the basmati rice it produces apart from a larger quantity of non-basmati variety. But now its export demand has already come down by 31 per cent and may decline by 38 per cent in 2009 as an outcome of the government policies and market changes in the last six months. Indians had spent millions of dollars and worked hard to win a big market for their basmati in particular at the direct expense of Pakistan –– the other country which produces the rare and precious variety –– and after facing numerous WTO disputes. That the Indians can give up their gains so easily is difficult to swallow. These economy measures at the most must be a temporary phenomenon and would go away once the current wave of shortages and high food prices begins subsiding.
But this wave, American officials say, is likely to linger for two to three years. The World Bank also puts it at three years. The prices will continue to stay high but would not escalate at the same rate as they did last year. Americans, however, insist on continuing production of ethanol which is widely seen as a major contributor to the current crisis, saying it is responsible for only three per cent of the overall increase in global food prices, while American Farm Bureau Federation says it accounts for up to 30 per cent of the surge.
Meanwhile, rice prices fell by 13 per cent on the Chicago Board of Trade, a leading market for global agricultural commodities, on May 16 on a report quoting Mohammad Azhar Akhtar, chairman of Rice Exporters Association of Pakistan that his government has permitted shipments of one million metric tons because local needs have been met. This development, coupled with Japan’s move to export its imported rice, helped ease concerns that a global food shortage was worsening, according to Bloomsberg.
A month before, prices in the world market had surged above the $1,000-a-tonne level for the first time as importers desperately looked for rice because most of the rice-producing countries have stopped exporting the vital staple commodity. The jump in price came about when the Philippines, the largest rice importer, failed for the fourth time to secure as much rice as it wanted. However, the prices came down by 11 per cent in the global market when the US agreed not to stop Japan from reselling 1.2 million tonnes rice imported from it. Japan is obliged to import American rice and cannot re-export it without US permission.
Meanwhile, Malaysia has given a new dimension to global rice diplomacy by saying it is prepared to offer palm oil in exchange for rice to any rice-exporting country. Such barter deals are a better way to build up rice stockpile. The proposal could lead to swaps with countries such as India because the latter is one of the world’s largest palm oil importers and was also the third-largest rice exporter until it imposed restrictions on overseas sales.
Pakistan can gain much from entering this kind of swap arrangement with Malaysia, a friendly country, particularly when it has placed no curbs on rice export and is also a major importer of palm oil. At the moment, only Thailand, Pakistan and the United States, among leading exporters, are exporting rice without any constraints. World rice trade is forecast to drop about by seven per cent to 28.8 million tons in 2008, mostly due to export curbs.
Why Pakistan is experiencing a continuing rise in prices of various rice varieties is difficult to understand at a time when it is in excess. Last week, the price of Sela type basmati increased by Rs3,000 per bag of 100 kg to Rs10,000, the highest-ever price so far. This shows that fixation of minimum export price by the government at $1,500, $1,350 and $750 per tonne for different varieties has failed to check speculative trading and had, in fact, further worsened the supply situation.
There is a strong reason to believe that the commodity trade is now largely managed by hoarders and speculators who have enormous funds at their disposal and have also the means to clandestinely store the stocks to create artificial shortages and keep the prices high. These price hikes have no relevance to the normal supply and demand factors.
It is amazing to note that wheat prices continue to increase during the harvesting of the crop. Maybe, a significant quantity of wheat finds its way across the border at a much higher rate, although 50,000 tonnes is already scheduled to go to Afghanistan. Meanwhile, reports that Pakistan is to import 2.5 million tonnes, including the 1.5 million tonnes earlier planned, have raised the prices in the international market. The wheat which was available at $350 per tonne rose to $400 over the announcement and by the time Pakistani importers would place orders, the price is likely to shoot up to $450. So, the imported wheat will also be sold at higher prices when it lands in local market, unless subsidised.
How far Pakistanis are going to respond to World Bank’s recommendation for ‘greater investment in agriculture’ is hard to predict, but a Dubai firm is looking at investing in agriculture in Pakistan. The firm whose CEO is a Pakistani, has bought agricultural land for the United Arab Emirates.
The firm, Abraj Capital, is working with the UAE government on agribusiness investments. The UAE has been holding talks with Islamabad about a framework for investment in its agricultural sector as it seeks to secure cheaper, long-term supplies of staples such as wheat and rice, the Financial Times reported.