ANALYSIS: Dwindling global rice surplus prompts price surge fears

By Apornrath Phoonphongphiphat and Ho Binh Minh, Reuters

Posted at Jul 15 2011 03:51 PM | Updated as of Jul 15 2011 11:52 PM

* Shrinking crop areas for top exporters Thailand, Vietnam

* Risks from adverse weather, labor and water shortages

* Global annual rice surplus to shrink 90% at decade end

BANGKOK/HANOI - A significant rice surplus is forecast to shrink by the end of the decade if more farmland in top exporting nations is put to industrial use and weather conditions worsen, keeping prices high as a growing world population boosts demand.

Ample supply may insulate Asia's main staple for at least two more years from price surges that have hit other grains, but costlier rice would feed food inflation worries, stirring fears of a repeat of the 2007/08 global food crisis that led to riots in some developing nations.

An estimated excess of 2 million tons of rice over the next three years is seen diving 90% to 200,000 tons by the end of the decade, under normal weather patterns, the Food and Agriculture Organisation (FAO) says.

The UN food agency and the Organization for Economic Co-operation and Development (OECD) see prices staying at the high levels persisting since 2007/08. Thai benchmark rice prices have jumped at least 40% in the last five years.

"We foresee world rice prices remaining above the levels prevailing prior to 2006," said Concepcion Calpe, a senior FAO economist, adding higher production costs due to competition for land, water, energy, fertilizer and labor backed that forecast.

That could worsen in the next decade if top exporters Thailand and Vietnam switch more land to other uses, water and labor shortages intensify and moves to improve yields prove ineffective.

Traders and analysts agree with the FAO projection of a precarious supply-demand balance and say a supply shock, or any aggressive moves by the incoming Thai government to intervene in the market, could drive up prices.

A plan by the Puea Thai Party to buy rice from farmers at 15,000 baht a ton could push export prices to as much as $870, but is not expected to stimulate output as the government is limited to buying a quarter of total production.

Self-sufficient, but for how long?

China is also increasingly exposed to extreme weather such as prolonged drought followed by flooding in rice-growing areas, driving it to buy more farm products, including rice, from neighboring Vietnam.

Supply concerns have also led major rice importers Indonesia and the Philippines to push up domestic production of the grain.

The Philippines, the world's biggest rice buyer in recent years, aims to import less than 500,000 tons in 2012, well below the record of 2.45 million tons last year.

"The Philippines hopes to be self-sufficient in rice by 2013 and is looking into the possibility of exporting rice after 2013," said Agriculture Secretary Proceso Alcala. To get there, his ministry has targeted record output of 17.4 million tons of paddy rice this year and 19.2 million in 2012.

Indonesia aims for record paddy output in 2011 and to raise annual production by 5% by opening up 2 million hectares of land up to 2014.

"I think they are achievable, both for the Philippines and Indonesia. I think achieving self-sufficiency is one thing, maintaining self-sufficiency is more difficult," said Samarendu Mohanty, a senior economist at the Manila-based International Rice Research Institute (IRRI).

But unpredictable weather around the southeast Pacific Ocean, such as the La Nina weather pattern last year, can easily defeat the plans, Mohanty said. "They can be self-sufficient as long as the weather is good."

The market doubts if Indonesia can reach its goals. It is looking to import more rice in the second half, after around 1 million tons in the first half, to make up for below-target stock procurement, traders and officials said, a move that will again expose it to price jumps of the kind seen early this year.

Food inflation worries

Rising benchmark oil prices, which hit a peak of $147 a barrel in 2008, led to higher rice prices by encouraging farmers to switch from food to biofuel crops.

A food panic ensued after India halted rice exports to secure supplies at home, while Vietnam banned new export contracts from March to June 2008 to meet local demand, leading to global tightness that tripled prices that year.

But this week, India has agreed to allow exports of 1 million tons of common rice from bulging stockpiles.

In 2006 before the panic set in, Thai benchmark 100 percent B grade white rice traded around $380 a ton, free on board. In April 2008, it hit a record of $1,080 a ton, after a move to support domestic rice prices in Thailand similar to the one proposed by the incoming government.

Current rice prices are still considered firm around $550, and the FAO said grains would stay at high levels historically. Surging wheat, corn and soybean prices drove the FAO food index to a record in February.

Output response

High rice prices have led Thailand and Vietnam to encourage farmers to produce more, through higher yields, but analysts said they were unlikely to push output much higher in the next few years.

Top exporter Thailand has 9.1 million hectares (22.5 million acres) for rice and, because of a land shortage, is banking on a new hybrid strain to help lift annual output by percent to 35 million tons of paddy by 2015, said Prasert Gosalvitra, director-general of the rice department.

"We need to maintain rice areas at this level and do all we can to increase yields to maintain our capacity to feed our people and be the number one exporter," Prasert said.

Second-biggest exporter Vietnam has 7.0 million hectares under rice cultivation, its agriculture ministry said. Urbanisation and industrialization could shrink that, requiring better farming techniques to boost yields if it aims to produce 44 million tons a year, from 40 million now.

"It's possible to reach 44 million to 45 million tons per year if fields are consolidated and intensive farming is undertaken," said Bui Chi Buu, director of the Institute of Agricultural Science for Southern Vietnam.