Good thing there's no inflation -- just maybe starvation

By Marianne Stigset and Tony Dreibus
Bloomberg News Service
Monday, April 7, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahaT0.5kV1JI&refer=home

From Cairo to New Delhi to Shanghai, the run on rice is threatening to disrupt worldwide food supplies as much as the scarcity of confidence on Wall Street earlier this year roiled credit markets.

China, Egypt, Vietnam, and India, representing more than a third of global rice exports, curbed sales this year, and Indonesia says it may do the same. Investigators in the Philippines, the world's biggest importer, raided warehouses last month to crack down on hoarding. The World Bank in Washington says 33 nations from Mexico to Yemen may face "social unrest" after food and energy costs increased for six straight years.

Rice, the staple food for half the world, rose 2 percent to a record $20.910 per 100 pounds in Chicago today, double the price a year ago and a fivefold increase from 2001. It may reach $22 by November, said Dennis DeLaughter, owner of Progressive Farm Marketing in Edna, Texas.

"Rice will gain substantially over the next two years," said Roland Jansen, chief executive officer of Pfaffikon, Switzerland-based Mother Earth Investments AG, which holds 4 percent of its $100 million funds in the grain. Governments will likely maintain curbs on exports "because those countries want to be able to continue to feed their own populations," he said.

The upheaval parallels turmoil in global capital markets that seized up nine months ago when subprime mortgages collapsed. The difference between what it costs the U.S. government to borrow and the rate banks charge each other for three month loans ended last week at 1.36 percentage points. A year ago the gap was 0.33 percentage point.

Rice-growing nations are driving up prices for producers that want to sell abroad. The Vietnam Food Association said April 2 it asked members to stop signing export contracts through June, following China, which imposed a 5 percent tax on exports as of Jan. 1. Egypt banned rice shipments through October.

Prices "are not coming back to the levels we came from," said Mamadou Ciss, head of Singapore-based rice broker Hermes Investments Pte Ltd. Vietnam's 5 percent broken-grain rice may be 40 percent higher within three months, he said.

Record grain prices are stoking inflation. Wholesale costs in India rose 7 percent in the week ended March 22, the fastest pace in more than three years, underscoring the threat from rising food costs, the Ministry of Commerce and Industry in New Delhi said April 4.

The increase may boost profits for suppliers. Padiberas Nasional Bhd. rose the most in seven years in Kuala Lumpur stock exchange trading last week. The company is Malaysia's only licensed rice supplier.

Goldman Sachs Group Inc. forecasts that all agricultural commodities it covers will rise during the next six months, except for sugar. Global cereal demand will expand 2.6 percent this year, 1.6 percentage points above the 10-year average, according to the Food and Agriculture Organization in Rome.

The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials gained for six consecutive years and advanced 15 percent this year.

"We have some very serious problems developing globally for food and energy," said Greg Smith, executive director of Global Commodities Ltd. in Adelaide, Australia, which manages $350 million.

World rice stockpiles are at their lowest levels since the 1980s, and the United Nations forecasts that exports will drop 3.5 percent this year.

Demand will increase 0.6 percent this year to 422.5 million tons, while production will rise about 1 percent to 422.9 million tons, the U.S. Department of Agriculture said March 11.

Rice yields globally expanded more than 40 percent from 1980 to 2000, according to data compiled by the USDA. They've increased only about 5 percent since then, the data show. Stockpiles will fall to 75.2 million tons, about half of where they were at the start of the decade, the USDA said.

"There's been no new technology revolution for the rice seed since the grains revolution in the 1970s," said Mehdi Chaouky, a London-based agricultural analyst with Diapason Commodities Management SA, which oversees $8 billion.

Some analysts say buyers in Thailand and Vietnam are hoarding grain and may release it in coming weeks, causing prices to drop. Another risk for speculators is that the increase will lead farmers to grow more crops. Wheat rose to a record $13.495 a bushel in February before dropping as much as 34 percent in the next five weeks, partly on expectations for more planting.

"There are lessons to be learned from what happened in the wheat market," said Darren Cooper, a senior economist with the International Grains Council in London. "The market will adjust, and moving forward we will see some restrictions on demand."

For now, governments are limiting exports to ensure they have enough food at home. Vietnam, the third-biggest rice exporter after Thailand and India, will reduce shipments 11 percent this year to 4 million tons, Prime Minister Nguyen Tan Dung said March 30.

"Bread is losing its place as the main staple food and rice is replacing it, and this created the problem," Ali Sharaf Eldin, chairman of Egypt's Chamber of Grains, said in an April 1 interview.

Investigators in Manila last month caught profiteers who were repackaging 20,000 50-kilogram bags of rice from subsidized government supplies for sale as higher-grade grain, according to Ric Diaz, an official at the National Bureau of Investigation.

The Philippines' state-run National Food Authority allows suppliers to sell at a subsidized price of 18.50 pesos (44.23 cents) per kilogram in low-income areas. People in the warehouse north of Manila were preparing to market the rice as a variety that sells for at least 35 pesos, Diaz said in a March 31 interview.

Drought is hurting plantings in China, where an estimated 19.4 million hectares (48 million acres) of arable land had been affected by March 26, according to Xinhua, the state news agency. Consumer prices in China, the world's fastest-growing economy, soared 8.7 percent in February, the most in 11 years.

"A constant price rise of rice can't be viewed as sustainable," said Abah Ofon, a commodities analyst with Standard Chartered Plc in Dubai. "As with any staple commodity, there's a risk of social tension when prices begin to rise."

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