Rice trade and lower prices

Tyler Cowen feels that the solution to lowering foodgrain prices is to have more trade in foodgrains. In view of the recent restrictions on rice exports in rice-producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt, global trade in rice is expected to decline by 3%. Cowen feels that restrictions on rice trade, which sees trade and production as a zero-sum game (one country's gain is another's loss), distorts the long run incentives for producers and chokes production.

He writes, "Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed. There is little incentive to plant, harvest or store enough rice — or any other crop, for that matter — as a hedge against bad times."

Cowen also argues that the very fact that an increasing proportion of major foodgrain production comes from poorer countries itself contributes to an inability to adjust quickly to global demand-supply mismatches. These poor countries are more likely to be protectionist, have stifling regulations, have restrictions on internal trade, and Government monopolies in trading.

These poor countries are also constrained by corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice. Cowen argues that these countries could easily increase their production manifold, if they could adopt many of the aforementioned practices and institutions, and thereby incentivize their farmers to respond quickly to global demand-supply mismatches.

I am inclined to believe that Cowen has got this one wrong on many counts. In the first instance, the article has little to illuminate as to how the central problem, that of higher rice prices, can be controlled by merely opening up economies to trade.

Secondly, the trade in agriculture commodities is very low not because of lack of incentives to trade, but because all these commodities have large captive domestic markets. In fact, in many countries, the domestic demand itself is too large to be covered by domestic production alone.

Third, rice and other staple food grains like wheat, especially in the poorer countries, are unlike other commodities. They exhibit inelastic characteristics - both from the supply and demand sides. On the demand side, these staple food grains do not have any substitutes and will have atleast the same demand, whatever be the price rise. On the supply side, it is very difficult to increase production significantly in the short term by bringing more land under cultivation or shifting from other crops or introducing technology and innovative practices to increaswe productivity.

Fourth, most countries and their farmers do not need the incentives of global trade to increase their production. The internal demand itself is booming in countries like China and India and their producers are not able to keep up with the growing demand. It is true that easing the internal restrictions and constraints that Cowen writes about, will help in incentivizing farmers to produce more.

Fifth, even higher production need not necessarily lead to lower prices, given the large and complex factors that determine global food prices - weather, bio-fuels, energy prices, agriculture policies in developed countries etc. Historically, foodgrain prices have fluctuated sharply in response to many of these aforementioned factors.

Sixth, even if global agriculture trade is deregulated and farmers have the full freedom to shift production in response to price signals, it will not ensure that the poor consumers in Asia and Africa are insulated from price rises for their staple grains. In fact, a free and unregulated market will exacerbate the crisis. Imagine what it would do to food security in India and across the world, if the wheat producers in the Gangetic plain and rice producers in the Krishna-Godavari basin in India shift to sugar cane, in response to a massive demand for sugar cane based ethanol bio-fuel!

Seventh, the major demand for rice and similar staple foods are mainly in the poorer developing countries, whereas the major demand for competing substitutes like bio-fuel crops etc come from the developed world. In an open global market in agriculture commodities, the price signals will always incentivize farmers to cater to the developed markets.

Finally, the whole objective is not to have, as Cowen claims, trade in rice "flow to the places of highest demand", but to have food security for all. It is undoubtedly true that trade will ensure that rice will flow to the countries with highest willingness to pay. Translation, the rich and well off will get their rice, while the others starve!

It is therefore critical that there be pro-active Government intervention to both ensure that staple foodgrain production is increased and these grains are available to the poorest at affordable prices. The answer to food security surely does not lie in Milton Friedman.