The rise in rice price: who is gaining this benefit?

Now at this time we find most food and product prices to be on the rise, including rice prices, which are usually low in the market. Though the rice price rise can be viewed as a benefit contribution to farmers, we are arguing if this is real.

Statistics for the price of milled rice and rice seed, (Table 1), show that the price of milled rice has risen, for example, with white rice prices having increased more than twice that of the original price. Thus, rice seed prices are higher as well; now fetching double the price of six months ago.

Table 1: Wholesale milled-rice price on the Bangkok market, and rice seed price in Nakornsawan, October 2007 to April 2008

The figures seems to show a beneficial gain for farmers from higher prices, as rice is their product sold to merchants and rice millers. But do we understand these statistics correctly?

Some in-depth analysis may show that farmers benefit from higher prices, but in fact, not by as much as we thought. Usually, rice seed is harvested in October and sold immediately to merchants or rice millers. However, according to the above table, rice prices were not high during the selling period of November to December. It was not actually until February that prices rose very quickly, after farmers had sold out of rice seed.

Thus, farmers who sold their rice last year didn’t receive much benefit from it, except for those few with their own silos who could keep their rice and sell it when prices were good. In fact, farmers who double-crop their fields and receive its produce this April or May can probably gain some benefit from the double rice price, compared to the past six months.

However, if most farmers do not really receive benefit from the rise in rice price, then who is earning this benefit? The answer is “whoever can foresee a higher rice-price in the near future, and who also has the potential to keep their rice seed until that time.

Most people think it the rice millers who benefit from this higher price, but, in fact, small-size rice millers may not profit much, for three significant reasons.

1. Many small-enterprise rice millers compete to buy rice seed from farmers. This group may have some power over the market, but not as much as the monopolists.

2. Most small-enterprise rice mills are traditional businesses with limited knowledge. Since the context of the rice market has changed a lot, these rice millers are unable to foresee all the related factors correctly, thus, they need to avoid any risk, as would occur when keeping their rice seed to sell when the price is higher. Most rice millers will immediately sell the rice that they buy from farmers. Although unable to earn much money, at least they can earn a certain amount of profit. This is more important to them.

3. Small-enterprise rice millers do not have much money and power to negotiate. Although they would like to risk the hoarding of rice seed, they cannot buy a lot of rice to keep.

On the other hand, the mega agricultural corporations are modern organizations with efficient management systems, negotiation power and large budget. Thus, they can compete with small-enterprise rice millers to buy rice seed from farmers (a good thing in my opinion), and can also exercise efficiency so as to hoard rice seed. These big corporations accumulate a lot of knowledge and high-potential human resources, so that they understand market conditions and are able to correctly foresee trends, thus being able to plan effective marketing strategies. Then, they will be willing not only to buy rice seed from farmers at a bidding price higher than that paid by the small-enterprise rice millers, but they will also rent silos to keep their rice seed when they can be sure of a higher price there in the more near future.

Do the mega agricultural corporations possibly stand to gain most benefit from the rise in rice prices?

I do not regard such business people as evil; to the contrary, they deserve it. A person who has higher efficiency should certainly profit more. But what we need to consider is how to let small businesses earn more money from this situation, especially at farmer level.

If farmers had their own rice silos, they could keep their rice seed and sell it when the price is high. Nevertheless, as this method requires much budget, and many people have already discussed it as a topic, I would therefore like to skip to another method.

My interest is in the knowledge gap between mega agricultural corporations and small-enterprise rice millers, a gap which is even worse for farmers. This is why small-enterprise rice millers cannot compete with big business, either through marketing strategies or to foresee the rice price. Due to the big knowledge gap between these two types of organizations, there is a huge difference in their profits.

At the present time, the economy is moving to be a knowledge-based economy. The more knowledgeable you are, the wealthier. I have already explained that knowledge creates efficiency and profit for business. In addition, knowledge is also a kind of public property that everyone can share, if the owner doesn’t keep it a secret.

Passing knowledge on to small rice millers and farmers could build an opportunity for them to earn more profit.

Knowledge in this case would mean the ability to foresee any situation after performing some research. Good research will provide a vantage point from which to foresee market factors and future rice price correctly. Thus, small businesses, rice millers and farmers will be able to make a right decision about when to sell their rice. This is what big business can already do, but small rice millers cannot yet do.

Though this notion cannot be adopted only at the level of small rice millers, it can become true at macro level. The government should support organizations that gather numerous small-enterprise rice milling businesses together, for example, subsidizing the Thai Rice Mills Association for conducting research so as to foresee the market. Association members must be able to access the results of that research. This will help them to make right business decisions and, consequently, to earn more profit.

Moreover, if small-enterprise rice millers can accurately foresee the market, their behaviour will be less risk-avoidant. Accordingly, when they expect a higher rice price, small-enterprise rice millers will be willing to compete with mega coroporations by bidding at higher prices in order to buy rice seed from farmers. Eventually, farmers could sell their rice seed at a higher price, in order to bring a bigger profit flow to farmers as well.

Widespread concern may exist over the collusion of small-enterprise rice millers negotiating with farmers in order to lower the price of rice seed. This may happen if there are only a few players. However, from past experience, vast quantities of milled rice have only spurred the intention of these players to compete with one another, including their attempt to compete with major companies as well.

In this era in which the economy is transforming to become a knowledge-based economy, the development of knowledge, and the creation of opportunities to access knowledge are both very important to major businesses as well as to tradition businesses, such as rice farming.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com