The record high rice prices that have spelt troubles for consumers domestically have prompted the government to introduce the ‘Blue Flag' low-cost rice program to help relieve consumer burdens. However, international rice markets have misinterpreted this measure as would generate greater volume of rice into the market. In addition to this, other factors including the possible appreciation of the USD, an expected easing of oil prices and the Philippine government's decision to change their rice bidding format to a government-to-government deal, which means that Thai rice exporters will not be able to participate in the upcoming rounds of rice bidding there, are all expected to help dampen global rice prices in the future. Signs were first apparent around the beginning of May when rice futures traded on the Chicago Broad of Trade started to decline, causing international buyers to postpone rice purchases pending clearer price movements.
Recent spikes in rice prices were caused by several factors as summarized below:
- Fundamental factors: Falling global rice reserves to the lowest level in 30 years, shrinking rice demand globally, and lower rice outputs from major rice producing countries, especially Vietnam and India which are experiencing erratic weather conditions and natural disasters.
- Speculations: Previously, the weakening USD and continual increases in oil prices prompted hedge funds to increase speculations on commodities, including rice. However, as the USD has begun to strengthen, while oil prices have eased, speculations on rice are now a less attractive choice for hedge funds and this has caused rice prices to drop.
An important observation is that volatility in rice prices is expected to be higher in the future, caused by several fundamental factors including rice output in Thailand, rice production/trade policies of rivals and trade policies of our trading partners. Regarding speculations on rice, this will depend on the future directions of USD and oil prices. US economic figures are an important determinant to the USD and whether they will improve as speculated by the market or not must be watched closely. If the USD weakens, then speculations on commodities will increase, so rice prices should surge again. Meanwhile, efficient news updates in the global rice market have allowed rice traders to cope with rapid changes in rice market more effectively.
Regarding the outlook for rice exports, changes in the export market will become apparent around the last quarter of 2008 when the planting season for 2008/2009 begins. We have to watch, if the two major rice exporting countries, namely India and Vietnam, being induced by favorable rice price, would decide to increase their rice production for exports or not. Their decisions will determine the global rice market from then. At the same time, other rice importing countries are also increasing rice production to ensure food security, which is expected to reduce rice demand globally. Global rice production might also be affected by other uncontrollable factors such as natural disasters and pests that could damage rice harvest in major rice producing countries.
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