High prices benefit rice exporters

The Asian middle class consumer remains the main attraction to investing in the region, despite alarming headlines about the recent acceleration in rising soft commodity prices and their negative impact on the average household budget.

According to Peter Dalgliesh, manager of the Pacific Assets Trust, the current high international rice price is more of a temporary anomaly whose origins are often misinterpreted.

"The current high rice price is often seen as a result of a contraction in productive agricultural land with rising urbanisation and industrialisation in emerging markets, " Dalgliesh said. "But the reality is that productive land area remains largely unchanged but the average calorific intake has increased substantially in emerging markets" Dalgliesh said. "This coupled with new developed market demand for food supplies, most notably biofuels, and the level of underinvestment in agriculture means that demand is outpacing supply."

Dalgliesh also pointed that poor productivity has meant that yields have not kept pace with population growth. "As stocks have diminished, prices have begun to move up. An element of fear has surfaced and this is leading to hoarding and speculative behaviour, making the whole situation even worse."

For those countries self sufficient in rice production, such as Thailand, India, Vietnam, Pakistan and China, the current high international rice price represents a potential unexpected boost to national income as marginal exports earn higher revenues. In contrast, for rice import dependent countries such as the Philippines, Malaysia, Nigeria and the Middle East, this represents an additional cost hurdle for their government's or consumers to overcome.

"We believe that the greatest challenge will be faced by the Philippines as the country imports the largest amount of rice in the world and also has the largest proportion of household budget going into food in Asia. Government policies to increase stocks as well as subsidise prices, will help alleviate the inflationary pressure, but unless there is an improvement in supply the situation will be difficult to finance for an extended period of time," he commented.

However, in contrast to the freeze on rice exports undertaken by India, China and Vietnam during the first quarter of the year, stocks are expected to be sufficiently replenished after the completion of potentially successful harvests by the end of this month. This should encourage domestic authorities to look to take advantage of the high prices and resume exports.

In 2007 Indonesia was the third largest importer of rice in the world but this is expected to reverse in 2008 as bumper harvests transform it into a net exporter."Consequently, our analysis indicates that the current high international rice price is more of an anomaly than a trend expected to persist for some time. Nonetheless, higher food prices are expected to weigh on the average Asian household budget, restraining discretionary consumption activity, increasing inflationary pressure at the margin, and limiting central banks ability to relax monetary policy in the near term."

Dalgliesh currently favours economies that can take advantage of price spikes as they are best positioned to enjoy a further broadening of domestic consumption as spending power shifts out from the urban centres into the rural regions, as well as stronger currencies as foreign exchange earnings accelerate.

"Thailand, as the largest rice exporter in the world, is the clearest winner. But at the margin, with widespread fears of rising inflationary pressures in the Indonesian economy well entrenched in the market, we suspect that Indonesia is actually the market with the greatest unexpected upside should successful rice harvests materialise."