Rice prices all set to pinch the pocket

There’s bad news in store for many households, trying hard to cope with a rise in prices of various staples over last few months.

They will now have to prepare themselves to pay more for rice. According to the latest data by Agriculture Marketing Information Network, the average price of rice across different states are already up 18.5% in the first week of November ‘07 compared to a rise of 8% during the corresponding week last year. And there’s expectation of a further hike in the offing in the coming weeks.

A combination of factors such as stagnant production, low level of buffer stock and the government’s inability to procure the targeted quantum of rice so far in the season has led to this situation. This has significantly curtailed the government’s ability to influence market prices of rice. So a shortfall in supply over demand in coming months is likely to lead to an immediate rise in retail price of rice.

Positive sentiments arose in October ‘07 on account of announcements of ban on non-basmati rice exports and hopes of a better arrival of new crop in the market have been belied. As a result rice prices have ruled firm on week-on-week basis as well.

“The government needs to be cautious enough to meet its purchase targets as the stocks of rice in central pool are already lower and offtake has increased significantly,” says NCDEX chief economist Madan Sabnavis. The stock of rice in the central pool declined to 11 million tonnes as on July 1, 2007 from a stock level at 25 million tonnes in 2001-02. Almost 94% of the total production is domestically consumed.

The government has targeted to buy 27 million tonnes of rice in the current season (October ‘07-September ‘08). Most of the purchases for central pool are made in the first two months of the season. However, the latest figures for October ‘07 are disheartening. There has been a 15% fall in rice procurement so far, till October 19 despite the announcement of bonus at the beginning of the arrival season and increase in minimum offered price.

One reason for this poorer procurement could be lower arrivals in the market. Though there was a good monsoon this year, the production of rice crop (kharif) is estimated to be stagnant at 80 million tones. An additional 10 million tonnes of rice is expected to be harvested in the forthcoming rabi season taking the annual production to 90 million tonnes for FY08.

The demand growth, however, continues to be robust, as indicated by a surge in offtake of rice for various government sponsored welfare schemes. The demand for rice is likely to go up due to an increase in number of schemes and substitution of rice for wheat under many schemes.

A sharp rise in minimum support prices (the prices at which government buys) reflects government’s alertness about the situation. There was a rise of 19% in MSP for paddy (common as well as Grade A) including compared to support price level a year ago.

Taking a cue from MSP, open market prices of rice are going to rule firm this year, feels the head of rice trade division of a leading commodity brokerage house. He further says ban on non-basmati rice export will have a minimal effect. It is because the exports are restricted to only premium varieties, which are not widely consumed in domestic markets.

But the further surge in prices could be contained if there are sufficient stocks in central pool.

Government can release more quantity in the open market whenever there is a sharp rise in prices. But, lower stocks of foodgrains in central pool restricts the capacity of the government to contain the spiraling open market prices, says Mr Sabnavis.

Hence, there may not be much of an option but to resort to aggressive purchase by the government to augment the lower stocks or imports as has been attempted in the case of wheat.

But, imports may not be a viable option as international rice prices are already soaring high. If India, the largest consumer of rice in the world, turns out to be importer it will add pressure on the demand side, pushing prices in international market.