Rice Self-Sufficiency and Rice Trade: Options for Food Security in ASEAN

Ramon Clarete

EXECUTIVE SUMMARY

The Association of Southeast Asian Nations (ASEAN) is important to the global rice market, particularly because the region includes the largest rice-exporting and rice-importing countries of the world.1 Nearly half of the rice that is traded comes from the region. The share may increase further with possible gains in higher productivity and competitiveness of the rice industries of Cambodia and Myanmar. On the other hand, Indonesia and the Philippines are among the largest rice importers, claiming an average of two-thirds of rice imports of ASEAN member states. However, both countries actively pursue full self-sufficiency in rice, investing on expanding production and restricting imports to increase local prices to encourage production. The dynamics of rice trading in ASEAN may explain to a great extent why rice trade in the world remains thin. The major rice-importing countries increase their rice imports substantially in times of extreme climatic situations, when their local rice outputs fall short of expected utilization requirements, or when they perceive a tightening of global rice supply as in 2008. Indonesia and the Philippines license rice imports to control the quantity of rice that comes in. In the Philippines, the government-owned National Food Authority monopolizes rice imports. Because of this off-on market participation of the major rice-importing countries in ASEAN, the bulk of the region’s rice exports go outside the region. In 2010, only about 13.6% of Thailand’s rice exports went to ASEAN member states. This share could have been larger if imports of rice were not restricted by ASEAN member states, and more importantly, if their import demands for rice were more predictable. The reluctance of the rice-importing ASEAN member states to rely on regional rice trade for their production shortfalls may be due to two factors. One is political. Rice farmers happen to be the largest in their respective populations and among the poorest. Import restrictions and public spending to increase local rice outputs are used to ensure the political support of rice farmers. The other factor is that rice trade is risky for food security. Rice-exporting countries are themselves susceptible to extreme climatic variations. A sharp drop in the rice outputs of Thailand or Vietnam, or even a large country like the People’s Republic of China, can trigger a sharp increase of world rice prices. With limited foreign exchange resources, rice-importing ASEAN member states run the risk they may not be able to afford the available rice. Worse, there may not even be rice to buy if rice-exporting member states unilaterally restrict rice exports, which happened in 2008. Clarete, Adriano, and Esteban (2013)2 provided empirical evidence that rice self-sufficiency programs

1 This working paper was prepared for the Second ASEAN Rice Trade Forum on 4–5 June 2013 in Yogyakarta, Indonesia.

Technical assistance was provided by the Asian Development Bank (ADB), with financing from the Japan Fund for Poverty Reduction. The author is the Dean of the University of the Philippines School of Economics. The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of ADB or the Board of Governors or the governments that they represent, or of the institutions at which the author works. 2 Clarete, R., L. Adriano, and A. Esteban. Forthcoming. Rice Trade and Price Volatility: Implications on ASEAN and Global Food Security. Economics and Research Department, Asian Development Bank (ADB).

2 | Second ASEAN Rice Trade Forum

are implemented as a virtual national self-insurance against the risk of excessive rice price volatility. They suggested that ASEAN member states develop their collective capacity to manage this risk to help restore and strengthen the confidence of member states in regional rice trade and to deepen rice trade in the region. One measure put forward is a possible deal whereby rice-importing member states scale down their self-sufficiency program levels in return for commitments from rice-exporting member states to supply their rice import demands at agreed prices. This paper assembles data on historical rice yields in the region’s two largest rice-importing and rice-exporting countries, and calculates their probability distribution. Using the Arkansas Global Rice Model (AGRM),3 the paper simulates what may happen to the performance of the rice industries of these countries if these are subjected to random shocks that emulate the distribution of historical rice yields. The exercise is done to calculate the probability that Indonesia and the Philippines become fully self-sufficient in rice. The simulation results indicate that Indonesia has apparently no likelihood of becoming self-sufficient in rice while the Philippines has only a 5% probability. Both countries are investing to increase rice yields. If these investments are sustained, there is a likelihood that these countries develop positive net exports given the continued high-price policy for rice due to import restrictions. These results, however, do not suggest that these programs are worth pursuing. The substantial amount of rice industry-specific public investments set aside in pursuit of self-sufficiency, combined with the economic cost to consumers of import controls, cast doubt on the economic desirability of self-sufficiency programs as the data in the Philippines indicate. The incremental rice produced by its program would cost the country far less if that rice was imported. The added costs of the program are even higher if one takes into consideration the inefficiency associated with import restrictions. That the self-sufficiency program is commendable on the ground that it comprises an income transfer from rice consumers to poor rice farmers is not particularly convincing. Only a third of the producer benefit from import restrictions accrue to the bottom 60% of the farmers. Moreover, their being consumers of rice greatly offsets the rents they receive from import controls. Worse, for the poorest 7% of rice farmers in the Philippines, the net benefit of import restrictions is negative. An often-cited risk of relying on thin rice trade is the 2008 experience. Rising domestic rice prices as world rice prices spiked drove two major rice-exporting countries, India and Viet Nam, to temporarily ban rice exports. Unproductive speculation in 2008 led to the self-fulfilling rice price crisis, which could have been avoided by disseminating market information and coordinating national responses to the spiraling of rice prices. However, export restrictions may arise when major rice-exporting countries run out of marketable surpluses following bad harvests. The results of the simulations indicate that in 2013, there is zero probability that rice-exporting countries run out of rice to sell to the rest of the world. Projections over the next 10 years suggest that the marketable surplus of Thailand increases. In 2022, there is 80% chance that Thailand’s net exports go up from a minimum of 10.3 million tons to as high as 12.4 million tons. In 2012, Thailand’s rice exports reached 7.6 million tons. However, there is 80% chance that Viet Nam reduces its marketable surplus from a minimum of 4.6 million tons to 3.3 million tons in 2022 from its level of 7 million tons in 2012. At worst, the projected reduction of rice exports of Viet Nam is offset by the minimum forecasted gain of Thailand. These export capacities have great potential for expanding with further investments in Thailand and Vietnam and with further productivity gains of the rice industries of Cambodia and Myanmar. But the

3 E. Wailes, who developed the Arkansas Global Rice Trade Model, conducted the stochastic simulations. Interpretation of the results are of the author.

Rice Self-Sufficiency and Trade: Options for Food Security in ASEAN | 3

investments needed to raise the marketable surplus of rice-exporting countries are not going to materialize with an off-and-on demand for rice in the world market by rice-importing countries. The incentive in making these investments is a stable and steadily growing rice market in the region, which in turn requires minimizing unnecessary disruptions of trade flows by acting on a few reforms. First, the risk of extreme rice price volatility can be minimized with several measures, including the following:

Gathering market-related data on rice and sharing information among member states. The ASEAN Ministers on Agriculture and Forestry (AMAF) created the ASEAN Food Information System (AFSIS) for this purpose. This capacity requires further strengthening, particularly in gathering and disseminating more up-to-date and more reliable data and information, and more importantly, in developing a capacity to undertake midterm projections of the rice industry’s performance.

Coordinating responses to any developing market tightness to prevent unproductive price speculation. With the regional rice reserve handled by the ASEAN Plus Three Emergency Rice Reserve (APTERR), the ASEAN Food Security Reserve Board (AFSRB) can be re-engineered to provide a platform for ASEAN rice importers and exporters to discuss untoward market situations. This may include the sharing of market intelligence, the validation of market tightness, and the determination of joint responses.

Second, the major rice-importing countries and rice-exporting countries can agree to ensure a more predictable rice trade. Rice-importing countries may offer to reduce their rice self-sufficiency targets and import the scaled-down quantities in government-to-government forward rice markets. In return, rice-exporting countries guarantee delivery regardless of the export policies they may decide to take. Indonesia and the Philippines maintain rice tariff quotas whereby a minimum volume of rice imports is guaranteed to come into the country at nominally low import tariffs. These are normally global quotas, but it would make a lot of sense if these were sourced from the region. In the case of the Philippines, part of the quota is earmarked for Thailand. Thus, with these contractual obligations, the market players are familiar with implementing agreements involving lower self-sufficiency levels in exchange for the guaranteed supply of rice. Third, with the creation of a single market of goods in the region by 2015, rice has to eventually become a freely traded commodity. However, Article 24 of the ASEAN Trade in Goods Agreement (ATIGA) has the potential of diluting the predictability of rice trade flows. The provision allows member states to temporarily waive their respective obligations under ATIGA in rice and sugar. Transparent rules on implementing this provision are needed to ensure predictability, including how the appropriate ASEAN body acts on applications by member states to use an Article 24 waiver for rice. The business process of implementing the trade remedies under the 1994 General Agreement on Tariffs and Trade may be a useful model in putting a predictable structure to Article 24. The ASEAN Rice Trade Forum, which the AFSRB convenes under its mandate from the ASEAN Ministers on Agriculture and Forestry, provides a platform for the timely and action-based discussion of policy bottlenecks in rice trade. Presently, most of the forum’s public and private participants are in the region. The forum may expand to add other key market players, including India and Pakistan among the exporters, as well as Bangladesh and ASEAN’s APTERR partners, the People’s Republic of China, Japan, and the Republic of Korea. The ASEAN Integrated Food Security framework has called for expanding rice trade, which requires nurturing the confidence in rice trade of rice-importing and rice-exporting countries. For rice-importing countries, rice trade is increasingly seen as reliable sources for their rice deficit requirements. For rice-exporting countries, stable and steadily growing trade is key to the further expansion of their marketable surpluses.