Regional rice exchange could help steady global prices

A regional rice index and commodities exchange could help calm world rice price fluctuations and ensure farmers get a fair price for their rice, according to a working paper by the Asian Development Bank (ADB).

"Very little stands in the way of bringing more price transparency and stability to both rice producers and consumers,” said Practice Leader for Agriculture, Food Security and Rural Development in the Regional Sustainable Development Department at ADB Lourdes Adriano. "ASEAN can play a critical role in helping the region ensure rice remains affordable by taking the lead on developing a regional rice price index and standardising rice grades.”

The report, 'Commodities Exchange: Options for Addressing Price Risk and Price Volatility in Rice', which was prepared in the recent ASEAN Rice Trade Forum, suggests futures and options could be traded on existing commodities exchanges in Hong Kong, China or Singapore, based on a regional rice index representative of the most exported and consumed grades of rice.

Top exporters like India, Thailand and Vietnam, could also establish domestic commodities exchanges, allowing farmers to obtain a better price by selling their most popular local rice grades directly in the market, rather than through a middleman.

For rice trading to be successful, essential building blocks need to be put into place, including warehouses, price dissemination systems, and education of market participants. Warehouses will give farmers the option of storing their rice and selling it when they feel prices are right, while knowledge of prices will help them plan their crops.

Price volatility in the rice market has been linked to the kind of opaque bilateral transactions that currently dominate the market. Using a commodities exchange, government agencies could instead act as aggregators for local rice farmers and hedge the price risk using the regional rice index.

An exchange could also provide an alternative platform to bilateral agreements, bringing much needed transparency in price discovery, thereby reducing price volatility.

In the medium-term, ASEAN could also develop an investment plan that will help build needed infrastructure, establish a subregional commodities exchange in the Greater Mekong Subregion, provide market information and intelligence, and offer programmes to develop farming skills.

Assuming normal weather conditions and the same macro conditions as 2011, total ASEAN rice output is projected to increase from 110.5 million metric tonnes in 2010-2011 to 128.3 million metric tonnes by 2021-2022.

Yields will grow slightly, by 1.22 per cent annually, while harvest area will increase by 0.15 per cent to nearly 47 million hectares by 2022. Production constraints include limits on land and higher input prices, particularly energy-based inputs and the crop’s high carbon and water footprints.