MANY people remember the high commodity prices in 2007 and 2008 and
pain felt when filling up their cars. Another crunch many Malaysians
dealt with was when the price of rice soared.
Rice, being a staple food for Malaysians, is threatening to spike up again with the Thai government set to pay its farmers a high price for the commodity as a means to lift rural incomes, and that will have repercussions for many rice consuming nations including Malaysia.
With an annual consumption of about 79kg per person currently, Malaysia is ranked among the top 10 highest rice-consuming nations in the world, say market analysts.
As
a priority item under the national food security, local rice stockpiles
must be kept at comfortable levels at all times to ensure consistent
supply and ample distribution to the public.
Hence, the task to protect and secure the national rice stockpile has been entrusted by the Government to Padiberas Nasional Bhd or popularly known as Bernas.
As the country's rice custodian, Bernas is the sole rice importer, purchaser of paddy from local farmers and distribution to retailers in Malaysia.
While Malaysia produces about 70% of its total rice needs, Bernas will need to supplement the 30% deficit via imports, particularly from major producers like Thailand, Vietnam and India.
Any potential disruptions, particularly in supply shortages or erratic upswing in global rice prices, will put Bernas on high alert to ensure the national rice stockpile stays intact.
More so with news that Thailand, the world's largest rice producer, is set to buy paddy from its farmers at a higher guaranteed price.
This has triggered fear among major importing nations including Malaysia that they may need to revisit the severe rice supply shortages in 2008.
The new Thai government will pay a guaranteed price of 15,000 baht (RM1,470) per tonne for unmilled white rice and 20,000 baht (RM1,960) per tonne for fragrant rice, which is about 40% to 50% higher than the previous market rates.
The Thai government's purchasing price is said to be even higher than Malaysia's average rice price at RM980 to RM1,150 per tonne.
It is widely speculated that the move may result in global rice prices escalating to US$800 by year-end from around US$600 per tonne currently.
At
the same time, rice supply from Thailand may be disrupted as its rice
exporters will likely be shipping less overseas as many are unable to
compete owing to higher shipment costs.
In April 2008, the price of rice nearly tripled to almost US$1,000 per tonne from US$362 per tonne in December 2007 as world rice stocks fell to a 30-year low.
This has resulted in many Asian countries scrambling to secure and replenish their stocks, hence the formation of many new rice stockpiling policy among the involved nations.
For Malaysia, it consumes between 2.2 million and 2.3 million tonnes of rice annually.
Currently, about 660,000 tonnes or 29% of the total consumption is subsidised by the Government. In 2010, the Government spent about RM470mil on rice subsidy.
Maybank IB Research believes the local rice industry is in no immediate risk of a subsidy removal. The Super Tempatan 15, the most popular variant of subsidised rice in the country, is priced between RM1.65 and RM1.80 per kg and is targeted for the rural poor with income of less than RM1,000 per month.
At the time of reporting, Bernas is not reachable for comment.
An analyst with Maybank IB Research, who attended a recent Bernas analysts briefing, says the Bernas management is unalarmed by the Thai government's new policy.
Former prime minister Thaksin Sinawatra implemented a similar policy, whereby paddy was bought at 14,000 baht from farmers from 2001 to 2006. “The previous policy was not successful as the Thai government bought rice and built huge stockpiles but only to dump its rice later at a heavily discounted price,” adds the analyst.
Bernas management instead view the Thai new policy positively at least in the short term.
Firstly, Bernas has already locked in its rice import requirements up till March next year and is therefore insulated from the current price fluctuations.
Malaysia's rice stockpile has risen to 292,000 tonnes from just 92,000 tonnes previously to protect the country's national food security. The current rice stockpile is said to be equivalent to 45 days of consumption for Malaysia's 28 million population.
Bernas also expects another positive outcome in the form of reduced rice smuggling from Thailand into Malaysia as there will be no financial incentive to do so under the higher rice purchasing scheme in Thailand.
“Rice smuggling is the main threat to Bernas. An estimated 200,000 tonnes is being smuggled into Malaysia each year via Thailand which robs Bernas of some RM300mil to RM500mil in revenue,” adds the analyst.
Prior to the new Thai rice purchasing policy, it is considered a financial “boon” to smuggle rice into Malaysia as Thai rice is cheaper and often perceived as superior quality.
If
a significant quantity of smuggled Thai rice reaches the hands of
wholesalers, many will not be interested to purchase rice from Bernas
and other local millers.
Left with no other alternatives, farmers will still need to sell their paddy to Bernas, the buyer of last resort, which buys local paddy at a minimum guaranteed price of RM750 per tonne.
Therefore, Bernas bears the brunt of the impact as it suffers from reduced sales and an rise in inventory cost.
The new Thai rice policy will also offer an opportunity to raise the prices of rice products in line with the global price surge, adds the analyst.
HSBC economist and co-head of Asian economics Frederic Neumann in the bank's Global Research Report entitled “What's cooking with rice?” says major rice importers like Malaysia, Indonesia and the Philippines will be in a vulnerable position given the potential hike in rice prices from Thailand.
He expects the move to trigger widespread hoarding activities among traders and consumers as the price of rice is expected to double once the policy is implemented in Oct 7.
“The rise in the cost price of rice, if sustained, could raise inflation across the region, especially Asean countries,” adds Neumann.
The impact of the rising Thai rice prices on inflation will depend on two factors;
First, it is how strongly domestic rice prices (i.e. Malaysia, Indonesia and the Philippines) respond to changes in Thai rice prices, and next is the weight of rice in the domestic consumption baskets. The weightage ranges from as low as 0.3%-1.7% in Hong Kong, Taiwan, South Korea and Singapore to more than 9% in the Philippines.
While Thailand's new policy by itself will not likely drive a full-blown spike in Asean inflation, Neumann points out that it is important to heed the lesson learnt in 2008.
Back then, the supply of rice remained relatively stable, but an initially gradual rise in prices was quickly exacerbated by the respective government's national policy responses.
However, he says: “We expect more measured government responses this time, preventing a repeat of what happened in 2008 but the risk of more material upward pressure in food prices remains.”
The price of rice matters hugely for Asian consumers and the region's central bankers as rice commands a big chunk of local CPI (consumer price index) baskets and its price is of importance to consumers' inflation expectations.
According to HSBC, the current buffer stock levels for major exporting countries is 84% higher than in 2008.
For Thailand, Neumann describes the short-term impact of the new policy as positive to its rice farmers. However, it will hurt other sectors of the economy and impair Thailand's status as the world's largest rice exporter in the long run.
There is a clear risk that Thailand will price itself out of the international market from the move.
Ultimately, he says other rice exporters such as Cambodia, Pakistan, India and especially Vietnam, the world's second largest rice producer, will seek to benefit from higher production and better quality.
Thailand's urban population will also have to bear the burden of higher rice prices.
Also, price control and/or subsidy schemes are ultimately distortive, which leads to less-than-optimal resource allocation in the economy and, in turn, hurt long-term growth.
Rice, being a staple food for Malaysians, is threatening to spike up again with the Thai government set to pay its farmers a high price for the commodity as a means to lift rural incomes, and that will have repercussions for many rice consuming nations including Malaysia.
With an annual consumption of about 79kg per person currently, Malaysia is ranked among the top 10 highest rice-consuming nations in the world, say market analysts.
Hence, the task to protect and secure the national rice stockpile has been entrusted by the Government to Padiberas Nasional Bhd or popularly known as Bernas.
As the country's rice custodian, Bernas is the sole rice importer, purchaser of paddy from local farmers and distribution to retailers in Malaysia.
While Malaysia produces about 70% of its total rice needs, Bernas will need to supplement the 30% deficit via imports, particularly from major producers like Thailand, Vietnam and India.
Any potential disruptions, particularly in supply shortages or erratic upswing in global rice prices, will put Bernas on high alert to ensure the national rice stockpile stays intact.
More so with news that Thailand, the world's largest rice producer, is set to buy paddy from its farmers at a higher guaranteed price.
This has triggered fear among major importing nations including Malaysia that they may need to revisit the severe rice supply shortages in 2008.
The new Thai government will pay a guaranteed price of 15,000 baht (RM1,470) per tonne for unmilled white rice and 20,000 baht (RM1,960) per tonne for fragrant rice, which is about 40% to 50% higher than the previous market rates.
The Thai government's purchasing price is said to be even higher than Malaysia's average rice price at RM980 to RM1,150 per tonne.
It is widely speculated that the move may result in global rice prices escalating to US$800 by year-end from around US$600 per tonne currently.
In April 2008, the price of rice nearly tripled to almost US$1,000 per tonne from US$362 per tonne in December 2007 as world rice stocks fell to a 30-year low.
This has resulted in many Asian countries scrambling to secure and replenish their stocks, hence the formation of many new rice stockpiling policy among the involved nations.
For Malaysia, it consumes between 2.2 million and 2.3 million tonnes of rice annually.
Currently, about 660,000 tonnes or 29% of the total consumption is subsidised by the Government. In 2010, the Government spent about RM470mil on rice subsidy.
Maybank IB Research believes the local rice industry is in no immediate risk of a subsidy removal. The Super Tempatan 15, the most popular variant of subsidised rice in the country, is priced between RM1.65 and RM1.80 per kg and is targeted for the rural poor with income of less than RM1,000 per month.
At the time of reporting, Bernas is not reachable for comment.
An analyst with Maybank IB Research, who attended a recent Bernas analysts briefing, says the Bernas management is unalarmed by the Thai government's new policy.
Former prime minister Thaksin Sinawatra implemented a similar policy, whereby paddy was bought at 14,000 baht from farmers from 2001 to 2006. “The previous policy was not successful as the Thai government bought rice and built huge stockpiles but only to dump its rice later at a heavily discounted price,” adds the analyst.
Bernas management instead view the Thai new policy positively at least in the short term.
Firstly, Bernas has already locked in its rice import requirements up till March next year and is therefore insulated from the current price fluctuations.
Malaysia's rice stockpile has risen to 292,000 tonnes from just 92,000 tonnes previously to protect the country's national food security. The current rice stockpile is said to be equivalent to 45 days of consumption for Malaysia's 28 million population.
Bernas also expects another positive outcome in the form of reduced rice smuggling from Thailand into Malaysia as there will be no financial incentive to do so under the higher rice purchasing scheme in Thailand.
“Rice smuggling is the main threat to Bernas. An estimated 200,000 tonnes is being smuggled into Malaysia each year via Thailand which robs Bernas of some RM300mil to RM500mil in revenue,” adds the analyst.
Prior to the new Thai rice purchasing policy, it is considered a financial “boon” to smuggle rice into Malaysia as Thai rice is cheaper and often perceived as superior quality.
Left with no other alternatives, farmers will still need to sell their paddy to Bernas, the buyer of last resort, which buys local paddy at a minimum guaranteed price of RM750 per tonne.
Therefore, Bernas bears the brunt of the impact as it suffers from reduced sales and an rise in inventory cost.
The new Thai rice policy will also offer an opportunity to raise the prices of rice products in line with the global price surge, adds the analyst.
HSBC economist and co-head of Asian economics Frederic Neumann in the bank's Global Research Report entitled “What's cooking with rice?” says major rice importers like Malaysia, Indonesia and the Philippines will be in a vulnerable position given the potential hike in rice prices from Thailand.
He expects the move to trigger widespread hoarding activities among traders and consumers as the price of rice is expected to double once the policy is implemented in Oct 7.
“The rise in the cost price of rice, if sustained, could raise inflation across the region, especially Asean countries,” adds Neumann.
The impact of the rising Thai rice prices on inflation will depend on two factors;
First, it is how strongly domestic rice prices (i.e. Malaysia, Indonesia and the Philippines) respond to changes in Thai rice prices, and next is the weight of rice in the domestic consumption baskets. The weightage ranges from as low as 0.3%-1.7% in Hong Kong, Taiwan, South Korea and Singapore to more than 9% in the Philippines.
While Thailand's new policy by itself will not likely drive a full-blown spike in Asean inflation, Neumann points out that it is important to heed the lesson learnt in 2008.
Back then, the supply of rice remained relatively stable, but an initially gradual rise in prices was quickly exacerbated by the respective government's national policy responses.
However, he says: “We expect more measured government responses this time, preventing a repeat of what happened in 2008 but the risk of more material upward pressure in food prices remains.”
The price of rice matters hugely for Asian consumers and the region's central bankers as rice commands a big chunk of local CPI (consumer price index) baskets and its price is of importance to consumers' inflation expectations.
According to HSBC, the current buffer stock levels for major exporting countries is 84% higher than in 2008.
For Thailand, Neumann describes the short-term impact of the new policy as positive to its rice farmers. However, it will hurt other sectors of the economy and impair Thailand's status as the world's largest rice exporter in the long run.
There is a clear risk that Thailand will price itself out of the international market from the move.
Ultimately, he says other rice exporters such as Cambodia, Pakistan, India and especially Vietnam, the world's second largest rice producer, will seek to benefit from higher production and better quality.
Thailand's urban population will also have to bear the burden of higher rice prices.
Also, price control and/or subsidy schemes are ultimately distortive, which leads to less-than-optimal resource allocation in the economy and, in turn, hurt long-term growth.
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