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Tuesday, 10 September 2013 21:22

India's New Grain Bill and the Geopolitics of Rice

By  Stratfor
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India's new Food Security Bill provides more food for the country's rural and urban poor at subsidized prices. However, the move could have repercussions in regional grain markets, specifically the rice market, as India -- the world's current top rice exporter -- prepares to address the food demands of its massive population.

For all of New Delhi's efforts, feeding India's 1.2 billion people still presents an enormous challenge. And when India, one of the world's leading agricultural producers, makes policy shifts to adjust to its own domestic concerns, very often the effects can be felt beyond its borders.

The Geopolitical World of Rice
Rice is one of the pillars of the global food supply, following wheat and maize. Unlike other grains, however, rice is not a fungible commodity because of the wide variation in rice varieties and country preferences. It is also unique compared to other globally traded grains, as it is the grain most commonly consumed in a milled rather than processed form; most wheat production eventually is used as bread or pasta, and maize is used for a variety of products from animal feed to sweeteners to fuel.

Because rice is usually consumed so close to the state in which it is harvested, strong local traditions and consumer preferences have developed over centuries of rice production and consumption. Short-grain rice varieties grown in Thailand and Vietnam, Southeast Asia's leading export markets, are not suitable replacements for Indian and Pakistani exports of long grain Basmati rice to the Middle East. Similarly, the U.S. market's decision to comingle varieties of short, medium and long grain rice during poor harvests affects those varieties' desirability on the global market. Rice is of particular importance to emerging markets as well, being a chief food staple in the majority of emerging markets in Southeast Asia and the broader Indo-Pacific basin.

Many of the world's top producers -- China, India, Bangladesh, Indonesia and Southeast Asia -- are also the world's top consumers. Most, and in many cases nearly all, of the rice grown by these countries is consumed domestically. Globally, the ratio of rice exports to rice production is smaller than comparative ratios for corn, wheat and soybeans.

This selectivity on behalf of importers often results in market scenarios where the overall average price of rice can be trending up or down while the prices of individual varieties -- such as Indian Basmati -- move in the opposite direction. These market conditions help to explain localized shortages, market panics and local government hoarding of certain rice types even when global rice production and stocks exceed demand.

This was the case in 2008, when India and Vietnam restricted rice exports, triggering a regional panic that sent ripples through global rice markets. Even though global production had thus far exceeded demand, lower levels of rice stocks in key consuming countries along the Indo-Pacific basin caused many local governments to panic, hoarding their own rice production destined for export. Political rather than weather- or harvest-related phenomena sent the costs of rice surging despite widespread availability of rice on the global market.

India's Place in the Rice Trade
India's rice stocks have risen steadily since 2008 -- by 4 million metric tons, or an increase of nearly 25 percent -- allowing for a large growth in exports as silos and storage areas have reached capacity. New Delhi's exports have overtaken more expensive rice from Vietnam and Thailand, traditionally the world's largest rice exporters, as India's exports have diversified from the Middle East and global Basmati markets to other markets from West Africa through the island chains of Southeast Asia.

Thus India's Food Security Bill has great geopolitical significance, specifically in terms of global rice markets. Indian media have hinted at the possibility of New Delhi's scaling back exports in anticipation of a surge in domestic consumption. India cannot both implement the Food Security Bill and maintain current export levels -- though failing to fully carry out the food subsidy overhaul would be in line with many failed social initiatives of the past several years. Other producers can offset any drop in Indian wheat and other grain supplies on the global market, but others cannot make up a loss of Indian rice supplies so easily due to the particulars of rice markets and consumer preferences.

Even as New Delhi is purging unfit grain from its silos, it is still likely to follow its traditional strategy of maintaining large domestic reserves -- at least 12 months' worth of consumption -- to hedge against crop failures or droughts. Maintaining domestic grain stocks while increasing the distribution of rice and wheat will strain Indian exports. While the government plans to allocate domestic production back into reserves as it distributes stocks, this does not account for rice or wheat stocks lost to rot and waste, or for the expected rise in consumption. This increases the likelihood of localized shortages, given the state of India's infrastructure, and puts the availability of Indian rice on global markets at risk.

Since 2008, however, importers and exporters of rice have increased domestic strategic reserves of the commodity to avoid a repeat of the 2008 rice crisis. It is unlikely, therefore, that India's Food Security Bill will affect global markets on its own. But with the world's largest rice exporter expected to reduce the availability of its rice on the market, there is very little room to hedge against other potential disruptions in supply. Vietnamese and Thai rice exports will become more strategic, and the consumption patterns of key consumers and importers like China, Indonesia, Nigeria and the Philippines will bear closer watching, as a poorer-than-expected harvest in any of these countries could trigger another global panic.

Editor's Note: This is the second installment of a two-part series on India's grain policies and critical role in the global rice market. Part 1.

Courtesy : Stratfor (www.stratfor.com)

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