ASEAN rice cartel carries more risks than benefits

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  A woman rides past a rice field on the outskirts of Hanoi. Photo: AFP

The long-term risks of the establishment of a rice export alliance among five ASEAN countries would outweigh the short-term benefits, as having a structure to monitor and supervise the behavior of the various members would be difficult to set up and costly to maintain, Yuriko Shoji, FAO Representative in Vietnam, tells Vietweek.

Vietweek: Five ASEAN countries, Thailand, Cambodia, Vietnam, Laos and Myanmar, have plans to create a rice export alliance. Do you think it is feasible?

Yuriko Shoji: The proposal by Thailand to constitute a rice cartel of major Asian rice exporters is not new. It was proposed for the first time more than a decade ago, with the initiative usually coming from Thailand and implicating the other major Asian rice exporters. So far, the proposal has not materialized.

There are concerns about the legitimacy of price fixing by a number of producing countries under World Trade Organization (WTO) trade rules, as such an association, or cartel would only include exporting countries and none of the major users of the commodity: importers such as Indonesia or the Philippines.

Because of the possible legal implications of the proposal, Thailand had modified its proposal in the past: instead of a grouping of exporters aimed at keeping world prices high, the association would take the form of a "study group", with the purpose of exchanging information on markets rather than fixing prices.

Even this new proposal was not followed up, probably because of the limited interest it generated in the targeted exporting countries (Vietnam, Cambodia). Therefore, there still are some major questions regarding the feasibility and sustainability of Thailand's initiative.

How would Vietnam benefit and what risks would it face from joining such an alliance?

 Yuriko Shoji, FAO Representative in Vietnam
By keeping international prices artificially high, the cartel would encourage more countries to expand their own cultivation, which eventually will erode the very bases of the cartel by the laws of economy. Also, members of such an association are competitors in the world rice market and have very different interests.

The cartel approach would require establishing some production and export ceiling or "quota" for each of the members, which is unlikely to be acceptable, especially as these would be eroded by production and exports elsewhere.

Establishing price ceilings on different types and grades of the rice traded internationally, and making sure they are respected would also be extremely complicated and require a structure which monitors and supervises the behavior of various members. This would be difficult to set up and costly to maintain, so in the long term, the risks would outweigh the short-term benefits.

How would the establishment of such an alliance affect the world rice market?

If such an initiative takes off, the implications could be serious in the very short term, but the effect would likely be short-lived especially because there is plenty of rice elsewhere, in particular in India, which this year has emerged as a formidable rice exporter. Rice is indeed a widely grown commodity, which, unlike crude oil, can be produced by many countries across the world with high price elasticity of supply.

The five countries in the proposed alliance are big rice exporters who are seriously affected by any price fluctuations in the world market. What should these countries, especially Vietnam, do to keep rice prices stable?

Within the context of shrinking import demand and rising export availability, the maintenance of high export prices by an alliance of countries would be extremely difficult and entail considerable costs for their sectors.

By ensuring regular, stable quantity of safe and high quality grains on the market, major exporters such as Vietnam could play a critical role in maintaining regional and global food security and ensuring that unnecessary speculation and hoarding behavior with negative impact on the world supply flow does not take place.

What should the Vietnamese government do in terms of international cooperation for rice production?

The FAO would encourage all concerned countries to discourage the cartel idea, because besides being most possibly illegitimate from a WTO viewpoint, it would not serve the country's own interest.

Vietnam has been active in South-South cooperation, in providing technical cooperation to the poor countries, particularly in Sub-Saharan Africa, to improve their production and food security. Vietnamese experts have traveled and worked with farmers and extension workers in these countries to bring the technology of rice cultivation, in which they have a long and proud tradition, to the recipient countries.

How does FAO see the world rice market this year? How will the market affect Vietnam's rice exports?

Global rice utilization in 2012-13 is projected to hover around 474 million metric tons (milled basis), six million tons more than the 2011-12 estimate. Of these, 400 million tons are estimated to be used as food, up from 395 million tons in the previous year. This would keep rice food consumption per capita stable around 56.6 kilo per annum, even though domestic prices in many locations are above those prevailing one year ago.

In sharp contrast with trends observed in the maize and wheat markets, rice prices have remained surprisingly stable after gaining 2 percent in May. Amidst abundant rice supplies and stocks, the likelihood of a strong price rebound in coming months is minimal, but the future direction of rice prices remains uncertain.

Global rice inventories at the close of the 2012-13 marketing years were revised upward by 200,000 tons to 164.5 million tons (milled basis). This would imply a nine million tons increase from the previous year and mark the eighth consecutive season of stock accumulation. Thailand needs to release its abundant stocks before the October harvest, which could impact prices; otherwise Vietnam's position as major exporter will remain unchanged.

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