Rice: Trade Issues for the ACP

Contents

1 Background and key issues in the rice sector.
2 Latest development
2.1 Global rice market trends.
2.1.1 The rice price surge: its impact and causes.
2.1.2 Current rice-market developments.
2.1.3 Future prospects for rice prices.
2.2 Developments in the EU and ACP EU rice sectors.
2.2.1 Developments in the EU rice market after reform
2.2.2 Trends in ACP rice production and trade.
2.2.3 ACP rice exports and duty-free, quota-free access.
3 Future issues and challenges in the rice sector.
3.1 Future rice trade with the EU
3.2 The policy implications of rice-sector developments.
Annex
Information sources

About this update:

CTA’s Executive brief Rice: Trade issues for the ACP, was published in June 2008 and in CTA’s Agritrade: ACP–EU Trade Issues (2009 Compendium). This update consists of:

1. Background and key issues: briefly summarising the original executive brief, and where necessary, updating developments related to key issues;
2. Latest developments and implications for the ACP: reviewing developments that have taken place since the publication of the original executive brief; examining the implications of recent developments for the ACP countries concerned.
3. Future issues and challenges in the rice sector

The original executive brief (2008) is available on request from: agritrade-mail@cta.int.

1 Background and key issues in the rice sector

As with many other products falling under the CAP the EU rice regime was traditionally based on a wholesale intervention price, in this case established for standard quality paddy rice. Given the level at which the intervention price was established, which was substantially above world market prices, this required the maintenance of high levels of fixed import duties to maintain a balance on the EU market, extensive payments for the storage of rice and provision of export refunds to allow the export of surplus rice.

As in other sectors EU rice-sector reform involved a shift from price support to direct aid payments to farmers. Initial reforms in 1995 had little effect on the over-production of rice within the EU, vast quantities of which were simply being produced for intervention storage. As a consequence EU intervention stocks continued to grow, peaking at 40% of annual EU rice consumption. Further reforms were therefore necessary. Proposals for reform in 2000 however were shelved and it was only following the introduction of the ‘Everything but arms’ (EBA) regime, which established a timetable for the introduction of duty-free access for LDC rice exports, that EU rice-producing member states bit the bullet of reform. The reforms tabled in 2003 involved:

• a reduction of the rice intervention price by 50%, bringing it down to €150/tonne and in line with world market prices by 2004/05;
• the incorporation of the rice sector into the single-payment scheme;
• the introduction of direct aid payments for rice farmers equivalent to 88% of the price reduction, involving an increase of direct aid payments to the equivalent of €177/ tonne;
• the reform of the intervention system with the establishment of a ceiling on purchases of 75,000 tonnes per annum;
• a modification of the EU import regime for cereals and rice.

These reforms saw market prices fall by between 21% and 31% below the peak pre-reform price levels. The reform of the rice regime initially saw prices offered for imports of rice from ACP countries decline by between 17.3% and 19.7% (see Annex Table A1). It also saw the EU expand TRQ (tariff-rate quota) access for major rice suppliers (see section 2.2.2.). This served to erode the margins of ACP/LDC tariff preferences in the rice sector. These two developments, erosion of the value of traditional trade preferences and erosion of the margins of tariff preferences relative to third-country suppliers, provide the background to the introduction on 1 October 2009 of full duty-free, quota-free access for LDC rice exports and the subsequent expiry of quantitative restrictions on ACP rice exports under the (I)EPA (interim EPA) arrangements.

In addition, by closing the gap between EU and world market prices the reform process meant that with the surge in global rice prices in 2007/08 EU market prices for rice began to follow world market price trends, thereby attaining the EU’s long-term policy objective.

Turning to the ACP countries it should be noted that rice production in most ACP countries is for local consumption or regional trade. Only two ACP countries have traditionally exported rice to the EU market: Guyana and Surinam. This trade took place on the basis of quota-restricted reduced-tariff access. This was a matter of complaint from the Caribbean exporters concerned who consistently sought the removal of these quantitative restrictions. The effect of these restrictions were highlighted by the in-direct trade with the EU which emerged through the Overseas Territories of the European Community (OCTs) (where minimal processing would take place to secure duty-free access) and which was subsequently restricted by the introduction of safeguard measures. This saw Guyana’s rice exports to the EU fall dramatically to below half of their peak levels, with exports via the OCTs falling from 90% to only 19% of total exports. While gradual concessions were granted it was only in the context of the signing of the Caribbean – EU EPA that restrictive import-licensing arrangements for rice were eased and, after a transitional period during which expanded quota restricted access was allowed, full duty-free, quota-free access to the EU market was introduced.

For least developed countries rice was one of three major commodities subject to transitional quota restrictions prior to the introduction of full duty-free, quota-free access from 1 October 2009 (quotas began at 2,517 tonnes in 2001/02 and expanded progressively to 6,696 tonnes in 2008/09). At the time of the launch of the Everything but Arms (EBA) initiative, a number of African countries considered developing rice production for export to the EU, but the process of price reductions which followed on from the introduction of rice-sector reforms, led to the abandonment of any such plans. Current investments in rice production in Africa are thus largely for national and regional markets.

2 Latest development

2.1 Global rice market trends

2.1.1 The rice price surge: its impact and causes

In 2008 global rice prices saw a dramatic increase. The FAO rice-price index (100 for the base period 2002-2004) rose to 137 in 2006 and 161 in 2007, and then surged to 295 in 2008, when prices were more than double what they had been in 2006 and almost three times the base level (see Annex Table A2). This has had a dramatic effect on the underlying objective of EU rice-sector reform, namely to close the gap between EU and world market prices. While prior to the surge in global rice prices EU market prices were between 140% and 190% above the EU intervention price, by mid-2008 they were 400–500% above the intervention price. These high EU prices saw EU production projected at around 11.5% higher than in the 2005/06 season.

Table 1: EU27: consumption, production, imports, ending stocks

Notes: USDA figures are slightly different from the figures given in the June 2009 EC analysis since they cover the EU27 countries and the EC analysis refers to EU25 countries for the years prior to the formal accession of Bulgaria and Romania.

Source: Extracted from USDA FAS ‘Grain world markets and trade’, Circular series FG 01-10, January 2010
http://www.fas.usda.gov/grain/circular/2010/01-10/grainfull01-10.pdf

An analysis of the causes of the 2008 surge in the rice price by the Centre for Global Development attributed the price surge to policy developments in India, Vietnam and the Philippines, rather than the underlying supply-and-demand situation. It noted that exceptionally high prices occurred against a background of ‘record world production and not especially tight stock levels’. It attributed price volatility to a combination of:

• export restrictions by India and Vietnam, which had previously accounted for 34% of exports in 2007;
• outright bans on exports in Cambodia, Egypt and other countries;
• rising oil prices;
• a weaker dollar;
• ill-considered public-procurement policies in the Philippines;
• self-fulfilling speculation on rising prices.

Of these measures the critical trigger was held to be the Indian export restrictions, in a context where India accounted for around one-sixth of the non-basmati rice trade.

A key consequence of the price surge is that governments which had run down physical stocks and relied on market-based food-security measures found themselves in considerable difficulties. As these governments once more sought to build up stocks in the face of rising prices, this further fuelled the price surge. The analysis concluded that the rice price surge ‘was the result of political considerations’ and was thus driven by policy decisions and not market fundamentals. According to this analysis ‘natural causes, such as the weather, the strong dollar, high oil prices etc. played only a supporting role’ (Table 2 compiled from USDA statistics broadly supports this analysis).

Table 2: World: consumption, production, imports, ending stocks (tonnes)

Source: USDA FAS ‘Grain world markets and trade’, Circular Series FG 01-10, January 2010
http://www.fas.usda.gov/grain/circular/2010/01-10/grainfull01-10.pdf

The EC concurs with this view, noting in its own analysis that the 2007/08 surge in the price of rice occurred despite world rice production exceeding consumption in recent years. The EC attributed the price surge to ‘a series of government interventions’ in major exporting countries, which limited exports in an effort to reduce domestic price pressures.

2.1.2 Current rice-market developments

The high prices experienced in the 2007/08 period led to ‘a strong expansion in world rice cultivation. According to the FAO’s Rice Market Monitor, global rice production in 2008 was 4% up on 2007 (USDA gives slightly different figures based on variable seasonality, but of the same order of magnitude). This production expansion saw a downward adjustment in prices, with the FAO rice-price index falling to 237 by November 2009 (from its peak of 295 – see Annex Table A2 for details). This still left prices 47% above the price levels prevailing in 2007. With ‘unfavourable climatic conditions in northern-hemisphere Asian countries’, the expected further expansion of rice production in 2009 did not materialise, with the FAO suggesting that global paddy-rice production in 2009 would be 3% less than 2008. In the third quarter of 2009 this saw rice prices beginning to creep back up, in the face of increased import demand from India and the Philippines.

World rice-market prices thus remain ‘still above historical levels’. This has important implications for the EU objectives of transforming the EU rice reference price into a ‘safety net’ price and ensuring that in future EU prices are guided by world market prices. This in turn has implications for the attractiveness of the EU market relative to regional and world rice markets, with there being little commercial benefit from targeting the EU market under preferential trade arrangements when EU prices are following the world market price trends. In this context exchange-rate issues (e.g. the strength of the euro and pound relative to the US dollar) and shipping-freight rates, are likely to play an important role in determining the relative attractiveness of EU and regional/world markets.

This being noted a certain ‘stickiness’ with regard to price reductions is apparent on the EU market, with EU market prices tending to decline later and more slowly than world market prices. In this context the EU market could well provide greater surety of income over a given time period. This could become an important consideration as ACP exporters begin to build up their marketing capacities with a view to maximising the share of revenue which they obtain from exports in a context of more ‘market based’ systems of price formation in the rice sector.

In terms of the global rice trade, a 2% expansion to 30.7 million tonnes is projected for 2009, with the EU being among the regions increasing their imports of rice (see table 1). Trade is then expected to contract by 1% in 2010 to 30.3 million tonnes. Global rice stocks meanwhile have increased to 121.4 million tonnes, an 11% increase. Stocks are expected to build up in several major importing countries, as well as in rice-exporting countries such as China, India, Pakistan, Thailand and the USA. World rice reserves now cover 3.2 months of global rice utilisation, with, according to the FAO, a stock-to-use ratio of 27%.

2.1.3 Future prospects for rice prices

According to the joint FAO/OECD assessment of future prospects for global rice markets, in the coming ten years world rice consumption is projected to ‘increase steadily over the baseline (by 1% annually), faster than production growth (+0.8% annually)’. Opinions differ however between the FAO/OECD assessment and FAPRI’s assessment over at which point consumption will outstrip production at the global level. Consumption growth is solely driven by population growth, since in major consuming countries per capita consumption is declining slightly as diets are diversified.

The rice trade is expected ‘to grow considerably’ (annually by 2.1% according to FAPRI and 2.2% according to OECD/FAO estimates), as domestic production in major importing countries is unable to meet growth in consumption.

Export prices of rice are expected ‘to weaken considerably in 2009/10 and 2010/11 as more exportable supplies become available’. However ‘from 2011/12, the export prices will start increasing again, driven by strong consumption and trade’, to reach US$526/tonne (FAPRI) or US$412/tonne (OECD/FAO) by 2018/19. ‘Average price rises over the baseline will be between 50%-60% higher compared to the average of the past decade’. This is good news for the EU, given the aim of turning the intervention price for rice into a ‘safety net’ price, with market prices being determined on the basis of what can be termed ‘regulated market prices’. The reality is that in a context where domestic EU production accounts for approximately two-thirds of all rice consumed in the EU, the EC has no intention of wholly liberalising the EU rice market (see section 2.2.2.), even in a context of extensive direct-aid payments to EU rice farmers.

Against the background of this EU position and the policy basis of the 2007/08 surge in the rice price, analysts of future prospects for global rice markets have concluded that government interventions are expected to play an increasingly important role in market developments.

2.2 Developments in the EU and ACP EU rice sectors

2.2.1. Developments in the EU rice market after reform

The nature of the EU’s managed trade regime for rice is set out in the EC’s evaluation of developments in the EU rice sector following reform, published in June 2009. This document highlighted the relatively high applied EU MFN tariffs for various types of rice, the quantity based triggers to determine the rate of duty applied for certain types of rice and the complex network of tariff-rate quotas established for the trade in rice (see Annex Table A5). These arrangements allow variable tariff rates to be applied depending on the quantity of rice imported in the preceding six-month period (based on the licences issued). These arrangements (with TRQs for India, Pakistan, the USA and Thailand amongst others) offer greater protection to EU markets when import volumes increase and reduced levels of protection when import volumes decrease.

According to the EC’s June 2009 analysis these new trade arrangements introduced following the reform of the EU rice regime had the following effects on the EU market balance:

• imports of basmati husked rice increased by 36% within four marketing years;
• imports of husked rice increased by 38.3%, but with 37% of this being accounted for by enlargement to include Romania and Bulgaria in the EU;
• imports of semi-milled and milled rice ‘gradually increased until 2007/08, when there was an abrupt 50% increase (+150,000 tonnes) on the previous year’, which resulted in an increase in the duty charged;
• ‘imports of broken rice increased from 185,000 tonnes in 2005/06 to a stable 240,000 tonnes in 2006/07 and 2007/08’, an increase of 30%, with over 55% of these imports being at ‘reduced or zero duty under preferential agreements and TRQs’;
• imports of small packages of milled and semi-milled rice fell by 7% from 35,812 to 332,275 tonnes between 2006/07 and 2007/08.

The analysis noted that following the introduction of the 2005 EU rice reforms, EU25 rice production initially fell from 1.68 million tonnes in 2004/05 to 1.59 million tonnes in 2006/07. However in 2007/08 rice production in the EU27 recovered to 1.68 million tonnes.

In terms of the market balance in the EU rice sector, ‘intervention stocks of paddy rice, which stood at 600,000 tonnes at the beginning of 2004/05, had been totally disposed of by 2007/08’. Overall the Commission reported that the EU rice industry ‘has maintained its level and has not been adversely affected by the different MFN and preferential trade agreements’.

Indeed, ‘the substantial increase in milled and semi-milled rice imports in 2007/08 appears to have had no negative impact on the industry’. However ‘in relative terms imports have gained in importance’, with total imports of rice, in milled equivalent, increasing from ‘715,000 tonnes in 2004/05 to 1,077,000 tonnes in 2007/08’, with this partly being partly due to EU enlargement. These imports have largely occurred in response to increased rice consumption in the EU and so ‘the agreements have had no adverse effect on the EU rice milling industry’.

In terms of the price effects, since the 2003 reform ‘EU paddy prices have been well above the intervention price … and have, globally, followed an upward trend. During the 2004/05 marketing year, prices were relatively stable within a range of €160/tonne to €240/tonne, depending on the origin and type of rice’. However, subsequently there was considerable price variation, with the largest increase in 2008, when following world market price trends, EU prices for Italian indica and japonica reached €480/tonne, ‘more than three times the intervention level’.

We thus see that EU rice prices are increasingly following global price trends, this is even the case at the much reduced price levels currently prevailing, which are nevertheless around 40% above historical global rice price levels.

Significantly, the EC assessment concluded that the trade agreements set in place served their purpose, of largely insulating EU producers from the effects of price declines, by allowing tariffs to be raised in response to import surges. As a consequence variations in EU rice production are largely ‘related to climatic conditions and producer choices rather than to import flows’. Significantly this analysis of developments in the EU rice market following reform made no reference to any noticeable impact on imports of rice from the ACP, despite the entry into force of full duty-free, quota-free access in the rice sector under the EPA and EBA arrangements.

2.2.2 Trends in ACP rice production and trade

Figures compiled by the US Department of Agriculture indicate that rice production in sub-Saharan Africa is expanding at a faster rate than consumption, particular following the global price surge (which constrained imports and consumption growth – see Annex Table A3). This has slightly reduced the ratio of imports to consumption, with three-fifths of rice consumed in Africa now being produced domestically within Africa.

According to the FAO the outlook is seen as ‘generally positive in Africa. Among the ACP countries where rice production is increasing are Ghana, Madagascar, Mali, Nigeria, Uganda and Zambia. This is expected to be off-set by production declines in Burkina Faso, Chad, Guinea, Liberia, Niger, Senegal, Sierra Leone and Tanzania. Most recently certain rice-producing regions in east Africa have been affected by drought, with this impacting on the overall continental picture.

Table 3: Sub-Saharan Africa: ratio of imports to consumption

Source: Extracted from data contained in ‘Grain world markets and trade’, Circular Series FG 01-10, USDA FAS, January 2010
http://www.fas.usda.gov/grain/circular/2010/01-10/grainfull01-10.pdf

In terms of future trends, according to the FAO, the expansion of domestic rice production in Africa is expected to be insufficient to meet expanding consumer demand for rice. This needs to be seen in a context where declining per capita consumption and increased yield in the main exporting countries will be generating ‘increased exportable surpluses’. Thus the FAO is expecting rice prices to fall back from the historically high levels, making it easier for African countries to meet expanding demand.

For the Caribbean (which includes non-ACP countries) following the global surge in the rice price, production has shown strong growth (+36.9% projected for 2009/10 compared to 2005/06), with this exceeding the rate of growth in domestic rice consumption (+11%). However a slowing down in the rate of consumption growth was noticeable in the face of the dramatic increase in global rice prices, with a dramatic decline in rice imports taking place (see Annex Table A4). Here again this has slightly reduced the ratio of imports to consumption, although more than 50% of all rice consumed in the Caribbean is still imported.

Table 4: Caribbean rice sector: ratio of imports to consumption

In terms of trends at the country level the FAO reports that erratic climatic conditions and lower price expectations have depressed production in Guyana.

While the EU is an exporter of rice, and its exports increased in response to the high global prices, it tends to export higher-quality rice which is not imported in significant quantities into ACP countries. EU rice exports are not therefore seen to pose any threat to ACP rice-sector development.

2.2.3 ACP rice exports and duty-free, quota-free access

Since 2001/02 season the two traditional ACP exporters of rice to the EU, Suriname and Guyana, were joined by LDC exporters. Under this arrangement quotas were increased annually by 15% (from a starting point of 2,517 tonnes) and MFN duties reduced, by 20% from September 2006, 50% from September 2007, 80% from September 2008 and by 100% from 1 September 2009. With the entry into force of the CARIFORUM-EU EPA, the quotas placed on CARIFORUM rice exports were expanded on a transitional basis (to 187,000 tonnes in 2008 and 250,000 tonnes in 2009), prior to the introduction of full duty-free, quota-free access from 1 October 2009. Figures provided in the EC’s June 2009 analysis show this resulting in the entry of the Dominican Republic into the EU market as a supplier of rice. Indeed the Dominican Republic immediately overtook Surinam as a supplier of rice to the EU market. The expansion in ACP rice exports which has taken place however is lower than the overall expansion of EU imports of husked rice and so as a consequence the share of ACP suppliers in total EU imports is falling.

While with the phasing-out of quantitative restrictions, CARIFORUM, LDC exporters and all ACP countries whose governments have initialled or signed IEPAs now enjoy full duty-free, quota-free access to the EU market (from 1 January 2010), it is unclear what impact this will have on exports to the EU so long as world market prices remain high. It appears as if, with high world market prices, and EU prices increasingly following world market prices trends, there are unlikely to be any significant price advantages in exporting undifferentiated rice to the EU as opposed to other regional or world markets. However considerable scope would appear to exist for the development of quality-differentiated rice exports to the EU, given the projected expansion of ‘luxury purchase’ components of the EU market once the economic recession comes to an end and previous consumption trends are resumed

Table 5: ACP husked rice exports to the EU (tonnes)

Source: Extracted from tables in ‘Complementary data to the report from the Commission to the Council on the operation of the agreement concluded in the framework of the GATT Article XXVIII procedure in the rice sector, CEC, Brussels, 30 June 2009, http://ec.europa.eu/agriculture/markets/rice/publi/com2009_314_workdoc_e...

3 Future issues and challenges in the rice sector

3.1 Future rice trade with the EU

The success that the EU has enjoyed in terms of maintaining a market balance in the rice sector has meant that EU rice market prices have been sustained at relatively high levels to the benefit of traditional ACP rice exporters. However, with EU prices increasingly following world market price trends, price premiums will in future largely be secured by shifting over to the production of ‘quality’ differentiated rice, within the framework of marketing arrangements which allow ACP producers to secure a greater share of the benefits of price premiums paid by European consumers for quality-differentiated products.

3.2 The policy implications of rice-sector developments

Rice production is expanding in both Africa and the EU. However, with rice markets becoming increasingly differentiated, this does not mean that competition is likely to increase between EU and African producers, since they serve different market components. Important questions arise however as to the impact which current IEPA provisions will have on the use of policy tools currently deployed by African governments in support of rice-sector developments. This needs to be carefully reviewed prior to the ratification and implementation of the agreed IEPAs, in order to ensure that the policy space for the further promotion of rice-sector development is maintained.

The experience in the EU rice sector highlights the benefits which can be gained from establishing a managed trade regime when a sector is undergoing restructuring or rapid development. This enabled the EU to successfully manage the process of change, in the context of both the implementation of reform measures and the expansion of market access for third countries. This could potentially offer important lessons for ACP governments currently successfully stimulating an expansion of rice production under favourable market conditions, in terms of how to manage rice trade relations in a context of price instability and a general downward trend from previous peaks levels.

Given the scale of growth in rice consumption in Africa, the question arises as to what policies need to be set in place to stimulate more rapid expansion of rice production in sub-Saharan Africa. While a NEPAD initiative has already been launched to support the expansion of rice production, consideration should also be given to what complementary trade regimes are required to support these efforts at production expansion, given the increased instability in prices on world rice markets. In this context the types of trade policy tools used by the EU to insulate EU producers from the effects of price declines would appear to warrant serious review.

However the administrative capacity to manage such a complex regime transparently should not be under-estimated and may well be inappropriate in the context of many ACP countries currently developing rice production.

In addition, analysis of the causes of the huge surge in the rice price, have highlighted the dangers of interventionist government policies in major rice consuming countries. These policies can drive price trends which are quite out of line with underlying market fundamentals. This would appear to highlight the dangers of relying exclusively on the market to ensure food security, if all global players are not following the same rules of the game. This use of trade-policy tools to ensure food security or maintain a market balance does not only occur in an Asian context, but is also an important characteristic of the EU rice regime, where an explicit aim of the current use of trade policy tools (TRQs and variable tariffs) is to insulate EU producers from the effects of price declines, by allowing tariffs to be raised in response to import surges.

This is an important point for ACP policy makers to note in the context of IEPA negotiations where the EC is trying to promote the systematic abandonment of the use of a range of trade-policy tools which allow governments to insulate their producers and consumers from global price instability. It should also be noted that the EU has open to it a wider range of financial policy tools and partial trade-policy tools than ACP governments when it comes to managing agricultural markets. The use of these EU tools has impacts on production and investment decisions which in turn carry trade implications which impact on the ACP-EU agricultural trade relationship. This needs to be constantly borne in mind in establishing the future trade framework for agricultural trade between the ACP and the EU.

Annex 1:

Table A1: average price per tonne of rice received by Guyana and Surinam

Sources: DG Trade-C-2 (BS) ‘Agricultural situation in the European Union’

Table A2: FAO rice price indices

Source: FAO http://www.fao.org/ES/ESC/en/15/70/highlight_71.html

Table A3: Sub-Saharan Africa: consumption, production, imports, ending stocks

Source: USDA FAS ‘Grain world markets and trade’, Circular Series FG 01-10, January 2010
http://www.fas.usda.gov/grain/circular/2010/01-10/grainfull01-10.pdf

Table A4: Caribbean: consumption, production, imports, ending stocks

Source: USDA FAS ‘Grain world markets and trade’, Circular Series FG 01-10, January 2010
http://www.fas.usda.gov/grain/circular/2010/01-10/grainfull01-10.pdf

Table A5: Summary of EU MFN rice import duties