Rice Cartel Plan Unlikely To Be Materialised

BMI View: We see Thailand's strong push to form a rice cartel along with other five ASEAN countries as unlikely to succeed. Although minor exporters are eager to cooperate in order to maintain a tight grip on international prices and boost them, other main exporters will remain out of the project, impeding its progress.

Thailand's strong push to form a rice cartel along with other five ASEAN countries in order to control and boost international rice prices is unlikely to materialise. In August 2012, the country revived this longheld goal and announced five Southeast Asian rice-exporting nations (the traditionally top two world rice exporters - Thailand and Vietnam - and their smaller neighbours Cambodia, Laos and Myanmar) are in talks to create a formal alliance aimed at boosting prices and increasing export revenues. The project primarily aims to share information and cooperate in production and marketing, with the goal of increasing rice export prices by 10% annually.

Thailand And Vietnam, The Cartel's Keystones
Select Countries - Rice Production ('000 Tonnes)

Thailand has for many years toyed with the idea of using its dominant market position to influence the price of rice. This is a decade-long project, as Thailand has been unsuccessfully attempting to create an international alliance to coordinate rice prices since 2002. A project similar to the current one gained attention again in 2008, but Thailand withdrew its proposal as it immediately came under strong criticism, both domestically and internationally.

Creating a cartel is all the more essential for the country now, as it will help plunging exports to recover and sustain the government rice mortgage scheme. The government has been paying above-market prices to its own farmers in a costly program to boost rural incomes and is reluctant to increase the flow of rice to the market by lowering prices ( see 'PTP Poised To Maintain Rice Policy', August 23, 2012, BMO Online).

Thai Rice At A Premium
Front-Month CBOT Rough Rice (US$/Cwt) & Thailand White 100% Grade B (US$/T) (LHS)

We reiterate our view that the rice cartel plan is unlikely to materialise ( see 'Thailand Rice Outlook: Q1 2011', October 21, 2010, BMO Online), for two main reasons. First, we do not see Vietnam's participation to the cartel as likely. Although the project can count on a strong support from Thailand and Cambodia, Vietnam, which would be one of the two pillars of the project given the volume of its exports, has marked a clear scepticism towards such a plan in the past years. The country's exports are benefiting from Thailand's rice scheme programs. Vietnam has been making inroads into some markets traditionally dominated by Thailand as Viet rice is now enjoying a US$100/tonne discount over Thai rice. Participating into the rice cartel would lead to a compression of the price differentiation and could hamper Vietnamese exports. Moreover, the poor record of cooperation between Thailand and Vietnam is strongly weighting against the implementation of a rice cartel.

Second, pro-cartel countries will have to face fierce opposition from key rice importers and ASEAN members Indonesia and the Philippines. Finally, extremely different conditions of the rice sector in the various countries will make the cooperation difficult. Thailand and Vietnam are the two leading rice exporters in the world, while output from Cambodia, Laos and Myanmar is relatively meagre but improving. Laos is a net importer of rice, and Cambodia and Myanmar export low quantities of rice. A lack of adequate facilities and infrastructure such as enough rice mills, storage and transport is constraining production and exports growth. Regulating supply of a perishable and bulky agricultural commodity in these conditions will prove to be challenging.

Excluding Other Key Exporters
Select Countries - Rice Exports (LHS) & Imports (As % Of Total)

Even if the cartel is actually constituted, we see its goal to set high prices as unlikely. Indeed, the five countries only account for 42% of total rice exports this season according the USDA, and have to face strong competition from India, Pakistan and the United States. Moreover, major importers such as China, Japan, Indonesia and the Philippines produce large quantities of rice domestically, which will make it even harder for the cartel to be effective in setting market prices.

Select Countries - Rice Production & Consumption
2011 2012 2013 2014 2015 2016
Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, Ministry of Agriculture; 2 USDA; 3 Federal Bureau of Statistics.
Rice Production, '000 tonnes 1 95,980.0 104,000.0 f 98,500.0 f 103,605.0 f 107,080.9 f 110,556.9 f
Rice Consumption, '000 tonnes 2 90,206.0 93,814.2 f 96,065.8 f 98,677.1 f 101,601.1 f 104,860.8 f
Rice Production, '000 tonnes 10,571.0 e 10,676.8 f 10,786.9 f 10,901.4 f 10,901.4 f 10,901.4 f
Rice Consumption, '000 tonnes 10,596.2 e 10,868.0 f 11,119.0 f 11,349.4 f 11,557.6 f 11,742.3 f
Rice Production, '000 tonnes 3 4,823.3 6,300.0 f 6,700.0 f 7,000.0 f 7,167.4 f 7,252.9 f
Rice Consumption, '000 tonnes 2 2,247.0 2,499.6 f 2,600.0 f 2,641.8 f 2,676.2 f 2,711.1 f
Rice Production, '000 tonnes 2 20,262.0 20,460.0 f 21,000.0 f 21,604.0 f 22,222.0 f 23,321.0 f
Rice Consumption, '000 tonnes 2 10,300.0 10,400.0 f 10,712.0 f 11,033.4 f 11,498.2 f 11,990.3 f
Rice Production, '000 tonnes 2 26,300.0 26,455.0 f 26,700.0 f 27,603.7 f 28,628.0 f 29,652.4 f
Rice Consumption, '000 tonnes 2 19,400.0 19,788.0 f 20,084.8 f 20,386.1 f 20,691.9 f 21,002.3 f

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