Unintended Consequences of Government Interference in the Rice Market

(710 words)

How many people have to die before governments stop manipulating markets? The answer is they will never stop. There have been two major rice crises this century, one international the other national. Both caused many needless deaths, both were caused by governments.

The first crisis
In early 2008, the price of rice increased 300% from $300 per tonne to $1200. This rise was initiated by an increase in the price of oil. Many rice exporting countries, such as India, Vietnam and Brazil, reacted by banning all rice exports, hoping to keep down prices in their own countries. This drove the international price up, making rice unaffordable in many importing nations, causing riots.

On 19 May 2008, the price of rice began to fall even faster than it had risen. This was because the Japanese government announced it would release 250,000 tons of rice to the Philippines. This was part of a 2.6 million ton rice mountain held in warehouses, enough to supply the Philippines for two years.

This rice was not produced in Japan but in the USA. Japan is, in fact, self sufficient for rice but the US government forces Japan to import hundreds of thousands of tons of rice from the US and China or else suffer penalties under World Trade Organization rules. This imported rice is considered inedible because the quality is so poor. Until 2008, most of it was mixed into livestock feed or given as food aid to North Korea.

I can attest to the poor quality of this imported rice. When I visited the Philippines last year, living among the villages, I almost starved. There was plenty of rice, but I couldn’t bear the taste of it. As rice is the staple food there, I ate no carbohydrates until I returned to one of the big cities where the quality of rice improved significantly.

The US was reluctant to allow the Japanese to release their rice, but it would possibly have suffered a backlash from its strongest ally in the Pacific if it continued to allow Philippines citizens to starve. Imagine how many lives could have been saved if that rice had never been put into storage but was allowed to be sold on the open market? How many children have suffered malnourishment because their parents could not afford enough rice since this policy was put in place in 1994? Even today, I have seen people walk from distant villages and queue for hours just for a few kilograms of free, low grade rice.

The second crisis
Today a new crisis is underway. 18 months ago, the Thai government decided it would be a good idea to create a new rice shortage. Thailand is one of the biggest rice exporters in the world. The Thai government decided to buy all the rice its farmers produced for about $500 per ton. It would then store the rice and drive prices up, allowing it to sell the rice for an even bigger profit.

Encouraged by the high prices and the expectation that the government would continue to support this scheme for many years, a large number of farmers took on big loans. But the scheme didn’t work. The Philippines has increased its rice production and countries such as India have returned to exporting. Moreover the price of oil has fallen, allowing rice to be produced at a much lower cost than in 2008. So the world has been able to manage without rice from Thailand and the price has stayed around $300 per ton.

So the Thai government must take a $200 per ton loss on the grain it has bought and it cannot suppport the rice buying scheme anymore. Some of the farmers have not even received payment for the grain they have sold to the government. This has lead directly to bankruptcies and suicide. While I feel sorry for those farmers, I believe this nefarious scheme would ended much worse if it had succeeded in its aims.

There’s a trading lesson in this. Beware of market distortions caused by government. They may take a short while to play out, as with the Thai example, or they may take decades, as with the WTO one. There have been examples in Australia, such as the collapse of ABC Learning. Governments do not learn from their mistakes, but we should.

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