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Asia Rice Prices Seen Firm As Output Slows
Dow Jones
MANILA (Dow Jones)--Declining rice production China and India which have large populations to feed, will keep Asian prices high in 2006 as already diminishing global stocks face further strain next year.

A government price support program in leading rice exporter Thailand, will also support prices next year, traders and analysts say.

Meanwhile, higher energy costs are forcing more farmers to get out of paddy cultivation and shift to more profitable crops such as corn, sugarcane and tapioca, which can be processed into ethanol, a gasoline increasingly in demand amid high oil prices.

The result could be a slower-than-usual supply-side response to high prices, indicating there are no quick solutions to the problem.

Despite government subsidies for rice cultivation, China, the most populous country and the world's largest producer of the grain, hasn't yet been able to effectively reverse a downward trend in production, which started in 1998.

According to Mahabub Hossain, senior economist at the International Rice Research Institute, China will cease to be an exporter soon and will start importing rice to feed its growing population.

"There has been less and less land allocated to rice cultivation because farmers see a lot of opportunity for non-rice crops such as fruits and vegetables because of growth in income. China simply can't come back to its surplus position," Hossain said.

Mamadou Ciss, managing director of Geneva-based Ascot Commodities, NV, a leading global rice trading company, agrees with that view.

"China's production is lower than expected due to a reduction in acreage. To meet the increase in consumption, they will definitely have to import more in the next two years," Ciss said.

China is estimated to produce 120 million tons of milled rice in 2005, a 7% rise from its output in 2004 of 112 million tons, its lowest level in more than 20 years. While not a significant rise, if achieved, this could mean the decline has at least been reversed.

However, China's rice stocks have fallen more dramatically and are believed to have declined by around 70% in the last five years.

The same scenario holds true for India, which like China is faced with a burgeoning population, Hossain said.

Production in Punjab and Andhra Pradesh, India's two main rice growing provinces, has been steadily declining as farmers switch to high value crops such as fruits and vegetables.

India's continuing dependence on monsoon rains for most of its crops is another problem.

"Unpredictability of weather patterns makes it difficult for India to achieve its previous level of production. Irrigation, which accounts for 20%-25% of production cost is a big problem," Hossain said.

India's rice output in the current crop year ending June 2006 is estimated to fall to 84.5 million tons, down about 1% on year.

Thai Govt Intervention Program To Support Prices

Despite lower exports from Thailand in 2005, market participants believe Thai offers will remain at high levels because of the government's price intervention program for paddy farmers.

"We see no weakness coming from Thailand. Prices will be pretty firm although we don't see any huge increases," Ciss said.

For instance, Thai 100% grade B, offered in the week ending November 18 at $285-$289/ton, free on board basis, Bangkok, could rise to more than $300/ton in 2006, he said.

However, prices aren't likely to rise beyond United States grade 2 price of $315-$320/ton, a variety comparable to Thailand's 100% grade B. "If international prices breach this level, some demand will go to U.S so there will be some resistance around this level," Ciss said.

Meanwhile Thai exports in 2006 are expected to fall to 7.2 million tons from an estimated 7.5 million tons in 2005 which itself will be 27% lower than a record 10 million tons exported in 2004.

But "the government strategy to help farmers keep prices at high levels will remain as the government will continue to favor farmers over exporters. As a government, the pressure would be to keep farmers revenues at high levels," Ciss said.

Analysts say the Thai government is unlikely to give into pressure from exporters to release stocks from its reserves. The government is believed to have a rice inventory of 1.5 million tons, after selling around 1.2 million tons in mid-2005. This excludes 9 million tons of paddy that the government plans to procure through this year's price intervention program which began Nov. 1 and will last until late February.

"There's no immediate need to unload. They can afford to keep as much as 2.5 million tons in stocks. They have also allowed on-farm storing, farmers will now be able to store the rice sold to the government in his own farm (providing) additional warehouse space for the government," he said.

But there could be some pressure on the prices of Thai jasmine varieties, said Vichai Sripraset, president of the Rice Exporters Association of Thailand.

"We are (expecting) an abundant crop of jasmine rice... We have more supply but are unable to sell. There is less demand in the market as prices are too high," Vichai said.

Global Weather Threats Limit Downside Potential

Uncertainties over global weather patterns will also likely limit the downside potential in rice export prices.

"The current situation anticipates a major weather disaster... it could be an El Nino or La Nina. Global temperature is getting warmer and based on temperature in Brazil, Russia, Argentina, we are already in a dry spell," Ciss added.

In 1997-98 for instance, a severe El Nino-induced drought raised global rice import demand by over 6 million tons. A sharp rally in prices was prevented only by China's decision to release some of its stocks and export around 4 million tons.

However, global rice stocks including China's inventory are believed to be considerably lower now.

"China's stocks are currently at its lowest level while global stocks are lowest in 30 years, good for only about 2-3 months of global consumption. If a major weather catastrophe happens, that will take rice prices to the moon," Ciss said.

The only sobering influence on prices in 2006 will be a likely decline in import demand from Africa in general and Indonesia in Asia, traders said.

In 2005, African countries imported 1.6 million tons more rice than in 2004 and are believed to be sitting on ample inventories. Thus imports in 2006 could slow down, they added.

Indonesia, previously a major buyer of Asian rice, is on the same path and is likely to continue to shy away from the import market.

According to Agriculture Minister Anton Apriyantono, Indonesia won't need to import rice in 2006, as domestic production will be sufficient to meet consumption. "We have no reason to import rice next year."

The Philippines though will continue to be an aggressive buyer in the rice market, said Gregorio Tan, administrator of the National Food Authority or NFA, a state-owned grains trading company.

Tan said Philippine rice imports in 2006 could still hover around the 1-million-ton-mark despite record paddy output of around 14.5 million tons in 2005.

"We're hoping that rising level of government stocks in Thailand could put pressure on international prices later in the year but it's always better for us to start buying early to avoid arrivals during the rainy season," he said.

In 2005, the Philippines imported 1.8 million tons of rice, the highest in seven years as dry weather conditions limited domestic supply. Most of these imports came from Vietnam.
MGR Archive 11.12.2005
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