ASEAN Rice Trade Forum: A Regional Cooperation for Food Security A Lecture Done at the Taiwan ASEAN Studies Center, Chung-Hua Institution for Economic Research August 8, 2013 R Clarete Professor, UP School of Economics
Key Messages
Two concerns are worth attending to: extreme food price volatility, particularly rice prices. While market fundamentals explain rising food prices, unevenly distributed and poor quality market information lead to trade shocks, which in turn cause food price spikes. A capability for harmonizing market information and coordinating policy responses to supply shocks and expected long term food imbalances is needed to manage the risk of extreme food price volatility. ASEAN rice trade forum can be an effective vehicle for generating and disseminating good quality market information in rice.
Real World Food Prices: 1970 to 2009
G20 Report on Food Price Volatility (2011)
Real food prices have fallen through time. Since early 2000, real food prices seem to have risen.
Food Price Volatility Matters for Food Security and the Economy
Food price volatility measures how food prices vary over time.
It is a concern for developing countries, with food having significant share of either their export receipts or import bills Consumers adjust household budgets to meet rising food costs, representing at most half, and for the poor up to three quarters of their budgets.
High or extreme price volatility causes uncertainty.
Other household spending gets crowded, e.g. education, medicine, Hunger, undernourishment, high incidence of disease, and decline in future productivity
Producers and those in the food supply chain facing sharply falling prices may see their investments in productivity put to waste. It may cause food price inflation, balance of payments pressures and consequent exchange rate movements and fiscal imbalances.
Extreme price volatility erodes confidence in trade: case of rice
As the 2008 rice crisis ended, member states renew commitments to becoming fully self-sufficient in rice. Self-sufficiency keeps rice trades down, in turn reduces AMS’ confidence in trade for their national rice requirements. Vicious cycle of low rice trade and higher spending on rice self-sufficiency programs.
Monthly Rice Prices 1/1960 to 6/2012
Large rice price spikes occurred in the 1970s; early 1980s; mid-1990s Since then, a period of low (yet unstable) rice prices ensued. Since early 2000s, rice prices gradually rose. Then the rice price peak in 2008 occurred.
Identifying periods of extreme rice price volatility
Measure of price volatility:
Rate of period-to-period change of price. Percentage change of prices through time (daily, weekly, monthly, annually Summary measure, e.g. taking the average of rate of change over a year, or taking the standard deviation of the rate of change Need to identify extreme rice price fluctuation or volatility. Extreme rice price volatility, rates of price changes that exceed a high-order quantile, 95%, 97.5 % or 99%, such that the probability of breaching them is respectively 5 %, 2.5 % or 1 %.
Fluctuations of Monthly Rice Prices
2008 rice price crisis stands out.
Three approaches
Approaches to identifying extreme rice price volatility
Time constant threshold Martins-Filho, Torero and Yao (MTY), spline-backfitted-kernel high-order quantile threshold Generalized Autoregressive Conditional Heteroskedasticity (GARCH)
MTY convention: defines a period of extreme rice price volatility as the the period lasting 60 days such that the rates of returns of daily prices of food breached MTY high-order quantile threshold.
Price volatility and tradability of rice
Tradability of three cereals
Relative Tradability of Cereals
Wheat is most tradable: average export to output ratio or XOR= 18.51 %. Maize is next: XOR=13.64 %. Rice is the least tradable: XOR= 3.98 %.
Rising Tradability of Cereals
25.00%
Trends of Exportability of Cereals, 1961 to 2007 Rice
20.00% 15.00%
10.00% 5.00%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
0.00% Source of Data: FAO
Trends In Importability of Cereals 25.00% Rice 20.00% 15.00% 10.00% 5.00%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
0.00% Source of Data: FAO
Stability of Tradability of Cereals
Monthly cereal prices, Jan 1960 to June 2012
Relative Monthly Cereal Price Volatility, 1960 to 2012
Average Volatility of Monthly Prices of Cereals, 1960 to 2012
Average Volatility of Annual Prices of Cereals
Relative cereal price fluctuations: frequency distribution
About 95% of price fluctuations are between + or – 20% Rice has the most number of extreme price fluctuations.
Tradability and price volatility of rice
In case of rice, tradability is inversely correlated with average price volatility. The inverse relationship does not hold up in the case of wheat or maize.
Maize Price Volatilit XOR y 1961-1969 1970-1979 1980-1989 1990-1999 2000-2010 1961 - 2010
Rice Price Volatility
Wheat XOR
Price Volatility
XOR
22.19 67.92 60.46 53.89 70.22
9.99 14.88 16.20 13.29 13.18
38.25 128.83 74.06 39.91 83.03
4.46 3.94 4.21 5.20 6.86
21.09 87.25 39.81 54.06 66.65
16.95 17.07 19.97 18.64 20.18
133.7 2
13.57
152.28
4.98
139.08
18.63
Source of Basic Data: Food and Agriculture Organization of the United Nations (FAOStat) for trade data; World Bank Commodity Price Data (Pink Sheet)
Testing the relationship using a gravity model of trade
A gravity model of trade – econometric model that explains the bilateral trade between two trading partners in a given product, say rice, using the values of explanatory variables. In the gravity model of rice trade the following explanatory variables were used:
GDPagri of exporting country, GDP of importing country, Population of exporting country, Population of importing country, Distance between trading partners, Price volatility a year lag, Price volatility two years lag, Similarity of language, Common border, Colony dummy variable, 2008 DV, Constant
Volatility variables
Average price volatility a year lag Average price volatility two years lag
Estimates from a gravity model of rice trade
Volatility dampens rice trade Estimates from a gravity model of trade Excessive volatility reduces trade.
What if price volatility was zero
How much additional trade is induced if price volatility is eliminated? Using the estimated Model B, we computed the natural logarithm of the average bilateral rice trade by plugging into the estimated model the mean values of the explanatory variables. We compared the respective trade values with and without price volatility. The percentage change of trade was computed after the anti-logarithm of these average values of trade. The result of all of these is that trade will increase by 59 % if price volatility is zero.
2008 Rice Crisis
2008 Rice Price Crisis
Why Food Prices Rose in the early 2000s: “Market Fundamentals”
Growing population and income in emerging and developing countries Oil price increases Demand for biofuels Lower food stocks Climatic change Slower growth of agricultural productivity Depreciation of the US dollar
But what explains extreme price fluctuations: Alternative hypotheses
Trade shocks (Heady; Slayton) Uneven and poor quality of market information
Trade Shocks and 2008 Rice Crisis
Headey / Food Policy 36 (2011) 136–146
Wheat Supply Shock Started it All
Headey / Food Policy 36 (2011) 136–146
Rice Trade Shocks
Headey / Food Policy 36 (2011) 136–146
Uneven and Poor Quality of Market Information
However, trade shocks are by themselves endogenous, i.e. part of the normal operations of the market. One fundamental factor is the uneven and poor quality of market information among players. Importers with low information level tend to stock up to avoid future price increases. All of them doing the same shift market demand to increase, causing import shocks.
Efficient market hypothesis
Theory asserts that market prices are “informationally efficient”. Market players form price expectations rationally
Given new information, say a drought in country X, agents adjust price expectations. Forecasts are based on new information. Not all agents need to have accurate price expectations, but as a whole the market is “right”. Responses to the shock or new information are random, and are normally distributed. Not one single agent can earn excess profits.
Expected price movements E[Pt+1] are governed purely by new information.
Grossman and Stiglitz Critique
Paradox if market prices are informationally efficient, then why do market players invest in gathering market information. Grossman and Stiglitz propose in their models agents with varying information to produce “partially informationally efficient” market equilibria. Grossman agents invest in gathering information to profit from the information disadvantage of other agents, increasing the information content of market prices, and arrive at a rational expectations market equilibrium prices. Such prices aggregate disperse information, while avoiding perfect revelation due to unobservable supply shocks.
Shiller’s irrational price bubble
Observation that volatility of market prices is extreme. Excess volatility is a result of psychological beliefs that exert a greater influence on the market than do economic fundamentals If prices of an asset begin to rise, positive returns by incumbent investors fuels the spread of over-enthusiasm in the market, attracting public attention New uninformed agents come in and bid up prices, feeding the expectation of future returns, and attracting more entry. Pessimism sets in, leading to a collapse of the bubble.
Self Fulfilling Crisis
Exporters anticipating higher prices tend to store stocks. Exporting countries likewise fearing shortages restrict exports. These actions result in export shocks. Combination of short run export declines, and import surges result increase market prices. As information is corrected and made more uniform among market players, market reverses.
Peculiarities of the rice market
Thin trade Presence of G to G trading. These do not help in the Grossman-Stiglitz process of aggregating information. Thus, irrational price bubbles build up.
Possible intervention: rice exchange
Commodity exchanges have two benefits
There are none for rice.
Efficient price discovery Risk reduction There are international exchanges for wheat, maize, and soybeans. Rice exchanges are national, and none regionally.
Rice trade is thin. Feasibility of a rice exchange is not well established yet. Policies may need to change first. Chicken-egg situation.
2008 was not due to market fundamentals
Timmer (2009) and Slayton (2009) noted, the ‘explosion’ of rice prices in 2008 could have been avoided because the market fundamentals did not support the price surge.
Possible Mitigating influence of Accurate Market Information
If information was more accurate and widely disseminated, the crisis may have been mitigated. The rice market in 2008 could have settled at the $600 per ton level. There would have been adjustments but the world could have saved more resources.
Interventions to improve resilience to food price crises
Reducing extreme rice price volatility: a framework
Rice stocks Rice market information and intelligence Rice trade facilitation
Rice stocks
Rice market vulnerable to extreme price volatility with low stocks to use ratios Reserves strengthen confidence of stakeholders in rice trade. Categories of rice reserves: emergency vs. smoothing intra- or multi-year price volatility (strategic reserves) Timmer suggests: reserves at four levels, private, country reserves (small importing), country reserves (large producing, importing), and international reserves.
Proposals on rice stocks
Increase stocks to use ratios Information sharing about rice stocks. International food agency to coordinate the operations of the reserves, to gather and disseminate information about food stocks. Emergency reserves, von Braum and Torero suggests about 5 % of food aid flows.
What ASEAN may consider
ASEAN now has the APTERR agreement with China, Japan and South Korea, Determining the appropriate size of reserves
Strategic reserves depend upon the reliability of sourcing imports from sources, availability of substitutes, and the holding cost.
ASEAN Plus 6 emergency rice reserves?
Bangladesh, India, and Pakistan
Market information and intelligence (1)
Trade shocks are not fundamental explanations for the price bubble in 2008. Speculative herding behavior Importance of generating and disseminating accurate market information More important side is the interpretation of the information. Need for tools to analyze the impact of supply and demand shocks as well as policy changes.
Market information and intelligence (2)
AFSIS as gathering basic statistics about the regional rice market.
Need for sharing market intelligence (e.g. close to real time stocks to use ratios, trade flows, policy developments, supply and demand shocks, etc.)
Regional cooperation
Intergovernmental bodies, say ASEAN, can invest in sharing and collective analysis of market information and data and serve as a focal information center. Credibility of the information center has the potential of harmonizing and upgrading information about the market. Produce a public good.
ASEAN Rice Trade Forum
Rice trade forum
ASEAN rice trade forum, platform for (1) sharing market information and intelligence, (2) coordinating policy responses to crisis situations, and (3) negotiations among importers and exporters. Continue the implementation of the Rice Trade Forum in ASEAN.
Background
31st Meeting in Bandar Seri Begawan on 13-14 July 2011
Special SOM-AMAF held in Siem Reap on 8 August 2011
decided to request the approval by the Special SOM of its plan to pilot test its Rice Trade Forum initiative. expressed its support to the proposal of the Chair of the ASEAN Food Security The SOM-AMAF requested the ASEAN Secretariat (ASEC) and the AFSRB Secretariat to coordinate with the ADB for the pilot implementation.
33rd Meeting in October 2011 in Jakarta, the ASEAN Ministers of Agriculture and Forestry (AMAF) endorsed the pilot implementation of the ASEAN Rice Trade Forum.
Background
January 2012. First ASEAN Rice Trade Forum meeting held in Siem Reap. May 2013. Second ASEAN Rice Trade Forum meeting held in Yogyakarta.
What is the ASEAN Rice Trade Forum?
A gathering of the representatives of Member States to collectively discuss and promote coordination of policies for food security in the region, with a particular focus on rice. ASEAN Food Security Reserve Board (AFSRB) is the convener of the Forum. Through the forum member states
share market information, collectively analyze data and market information, coordinate policies to mitigate or avoid extreme rice price fluctuation, discuss long-term/strategic policy reforms for a sustained development of regional rice trade.
The Forum
Does not set but recommends policies and actions to SOM-AMAF and AMAF through the AFSRB.
During rice crisis situations, to mitigate rice market volatility and to identify safety nets
Under normal situations, to improve the efficiency of the rice supply chains in the region, enhance and deepen regional rice trade, and to develop market-based mechanisms to reduce food price risk
The Forum
Makes use of existing sources of rice and related food statistics such as AFSIS, FAOStat, USDA, AMIS in doing its work
Complements data obtained from existing sources with relevant market intelligence
Undertakes analyses of impacts of policies and other “shocks” on the rice market using a model of the global rice market
Makes evidence-based recommendations to SOM-AMAF and AMAF
Outputs of the Rice Forum
ASEAN Rice Market Situation and Outlook
Studies on the likely sources of rice market instability (done as a rice crisis situation is developing).
Recommendations on coordinated actions to respond to rice crisis situations; and
Studies on mechanisms aimed at helping prevent extreme rice price volatility and on opportunities for enhancing rice trade, and
Recommendations on appropriate actions to enhance rice trade and related measures.
Thank you for listening.
