As Demand for Rice Climbs, International Trade Falls

Rising food prices mean hunger for millions and also political unrest, as has already been seen in Haiti, Egypt and Ivory Coast. Yes, more expensive energy and bad weather are partly at fault, but the real question is why adjustment has not been easier. A big problem is that the world does not have enough trade in foodstuffs.

The damage that trade restrictions cause is probably most evident in the case of rice. Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 percent to 7 percent of the world's rice production is traded across borders; that's unusually low for an agricultural commodity.

So when the price goes up – indeed, many varieties of rice have roughly doubled in price since 2007 – this highly segmented market means that the trade in rice does not flow to the places of highest demand.

Poor rice yields are not the major problem. The United Nations Food and Agriculture Organization estimates, that global rice production increased by 1 percent last year and forecasts an increase of 1.8 percent this year. That is not impressive, but it should not cause starvation.

The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports in rice-producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt.

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive.

Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed. There is little incentive to plant, harvest or store enough rice – or any other crop, for that matter – as a hedge against bad times.

This tendency to skew supply and demand is also apparent in the Philippines, where the government is tracking down and arresting rice hoarders, who, of course, are simply storing rice for the possibility of even harder times to come.

In commodity markets, it is not uncommon for high demand to cause sharp increases in prices; on short notice, it is often hard to match the new demand with more supply. The question is whether supply, and trade, can grow to offset market tightness.

Restrictions on the rice trade run the risk of making shortages and high prices permanent. Export restrictions treat rice trade and production as a zero- or negative-sum game where one country's gain comes at the expense of another. That's hardly the best way to move forward in a rapidly growing world economy.

This lack of support for trade reflects a broader and disturbing trend. An increasing percentage of the world's production, including that for agriculture, comes from poor countries. Over all, that is good for rich countries, which can focus on creating other goods and services, and for the poor countries, which are producing more wealth. But it can slow the speed of adjustment to changing global conditions.

For example, if demand for rice rises Vietnamese farmers – who remain shackled by many longstanding regulations of communism – are not always able to respond quickly. They do not even have complete freedom to ship and trade rice within their own country.

Poorer countries also tend to be the most protectionist. To make matters worse, about half of the global rice trade is run by politicized state trading boards.

The reality is that many of today's commodity shortages, including that for oil, occur because ever more production and trade take place in relatively inefficient and inflexible countries. We're accustomed to the response times of Silicon Valley, but when it comes to commodities production, many of the relevant institutions abroad have only one foot in ihe modern age. In other words, the world's commodities table is very far from flat.

Many poor countries, including some in Africa, could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice.

The ability of a country to grow rice depends not just on its weather, but also on its institutions. Burma, now Myanmar, was once the world's leading rice exporter, but it is now an economic basket case and many of its people go hungry.

Of course, wealthy countries are partly at fault, too. Japan, South Korea and Taiwan all protect their native rice farmers; rice is grown in Spain and Italy, aided by European Union subsidies and protectionism. The United States spends billions subsidizing domestic rice farmers.

In the short run, these domestic rice producers mean less demand pressure on the world market, which might seem like a good thing. But, again, the longer- term effects are pernicious.

Low-cost rice production in countries like Thailand is not geared to meeting higher foreign demand, as it the grains are slow in coming. And the protected rice from wealthy countries is simply too expensive to alleviate hunger in very poor countries.

Lately, it is become fashionable to assert that, in this time of financial market turmoil, the market-oriented teachings of Milton Friedman belong more to the past than to the future. The sadder truth is that when it comes to food production – arguably the most important of all human activities – Friedman's free-trade ideas still have not seen the light of day.