Rice Market Risk: Insights from Côte d’Ivoire

By Ralitza Dimova and Patrick Monnet Gbakou

The rise of global food prices by approximately 50% between April 2007 and March 2008 stimulated heated academic and policy debate on the welfare implications of price risk. FAO (SOFI 2008) estimates that rising prices plunged over 24 million additional people in Sub-Saharan Africa into hunger, increasing the number of undernourished in the region to a record 236 million. While a number of cross-country and/or simulation-based academic studies support this evidence, by predicting dramatic negative implications of rising food prices on the welfare of the poorest population strata of underdeveloped food-importing countries (e.g. Policy Research Working Paper series 4738-4745 (World Bank); Zezza et al, 2008), others warn against oversimplifications and underline the continued need to put price shocks in a historical perspective and explore the complex implications of food prices on both the supply and demand side of the market in single affected contexts (Aksoy and Isik-Dirmelik, 2008; deJanvry and Sadoulet, 2008; Swinnen, 2011). The research summarized in this article attempts to fill some analytical gaps and take a well-rounded viewpoint of the debate, specifically focused on an empirical analysis of the welfare implications of rising rice prices in Côte d’Ivoire.

Cote d’Ivoire: A case study

In Côte d’Ivoire, the average yearly food price index increased from 117.51 in 2006 to 123.77 in 2007 and 137.78 in 2008, despite pre-emptive government intervention in the form of reduced import tarriffs and value added taxes, direct price regulation and attempts to reduce excessive speculation in the trading of food commodities. Following riots and violence in the streets of Abidjan in 2008, President Gbagbo embraced a policy stance in favour of achieving self-sufficiency in staple foods. Such a policy stance in the face of severely fluctuating food prices today is especially pertinent to explore in the context of Côte d’Ivoire’s economic structure and historical experience. While tropical cash crops such as cocoa and coffee dominate the production and export side of the market in Côte d’Ivoire,, skyrocketing demand for food crops, in particular rice, coupled with the inability of local producers to respond to demand, has led to a dramatic surge in imports. Indeed, despite being self-sufficient in local staple crops like millet, sorghum, fonio, cassava, plantain and maize, Côte d’Ivoire has seen series of unsuccessful attempts by the government to stimulate rice production to the demand-required levels. The most ambitious 1970s program geared towards self-sufficiency in rice via heavy subsidization of local rice producers, led to successful two-year increase in local production to the level of total demand, but it lead to bankrupty and was abandoned by 1977 due to an inability to resolve the dilemma of balancing producer support with low consumer prices under the constraint of limited financial resources. By contrast, the falling prices of export crops in the 1980s unleashed the structural reforms of the 1990s, which led to a dramatic shift in policy making, marked by external and internal liberalisation of the rice market. On the one hand, the reduction of border controls as part of WTO requirements increased competition from cheaper imports. While on the other hand, rice import activities were shifted to the local private sector and the price of rice for mass production was liberalised. Some recent research suggests that the reforms had an altogether negative impact on both producers and consumers of rice, mainly due to monopolization of the rice imports by politically powerful elites and the inability of local producers to keep up with better quality imports (Diagne et al, 2003).

Figure 1: Top imports, top exports and top agro production items Côte d’Ivoire

Source: FAOSTAT: http://faostat.fao.org/default.aspx

In the face of skyrocketing import prices for rice and structural constraints in the local rice market, the discrepancy between the revealed comparative advantage and export portfolio on the one hand, and the food production potential and import portfolio, on the other hand (See Figure 1), raises several immediate welfare-related questions.

  1.  Is demand for imported staple food varieties sufficiently irresponsive to the rise in their prices to justify welfare deterioration of the dimension highlighted by various policy circles, or could demand and supply of local staple food alternatives help smooth consumption? While research on the food price inflation effect of the 1994 devaluation concludes that rice intake in Côte d’Ivoire remained unchanged in the face of rising prices (Diagana et al, 1999), more recent studies emphasize the possibility of greater willingness of consumers to switch to local staple food varieties as in the context of dramatic price shocks such as those of 2007-08, thus making dramatic reversals of rice production policies unnecessary (Aker et al, 2011). However, more research is needed to resolve these controversies in the literature and provide unambiguous guidelines on appropriate food policies.
  2. Can incomes from appropriate activities, such as tropical export crop production, be used to smooth consumption and hence, is it feasible, and indeed desirable, for producers to increase food crop production, possibly at the expense of cash crop production? While Sahn (1990) and Jedwab (2012) find that allocation of land from major export crops into food crops did not improve child nutritional status in Côte d’Ivoire in the 1980s and 1990s, this research relates mostly to the livelihood choices of rural households and does not give clear welfare oriented answers for the country as a whole, especially vis-à-vis the presumably most vulnerable, poor strata of the urban populations.
  3. Are poorer or richer households more affected by either of these scenarios? As indicated at the outset of this article, there is no clear answer to this question.

To answer the above questions, Dimova and Gbakou (2012) provide robust estimates of the welfare implications of rice price changes across quintiles in the country’s welfare distribution and separately for predominantly food producing Northern regions in the country and predominantly cash crop producing Southern regions in the country. They then explore the consumption smoothing effects of (i) consumption and production of local food varieties and (ii) the production of key cash crop commodities: cocoa, coffee, palm oil, cashews and banana.  They find that while for middle-income households the negative welfare response to a changing price of rice is significant and not sufficiently alleviated by the consumption or production of alternative food varieties (perhaps indicating that the answer to the first question raised above is generally in the negative) self-subsistence assures immunity to food price shocks to the poorest households in both rural and urban areas. Furthermore, when both cash and food crop production is taken into account, the negative impact of a food price shock becomes negligible and is restricted solely to a small fraction of the middle-income range of the urban sector. Finally, staple food price shocks are likely to induce a reallocation of income from households residing in relatively richer urban and Southern parts of the country towards relatively poorer rural and Northern parts of the country.

Conclusion

The results have important policy implications. To begin with, they provide no convincing evidence favouring re-specialisation out of cash crops into food crops such as rice as a viable welfare-enhancing and inequality reducing strategy. Although the analysis of Dimova and Gbakou (2012) does not show clear evidence in favour of the consumption smoothing effect of the demand and supply of local staple food varieties such as millet and sorghum, the consumption smoothing effect of export crops is evident and not restricted solely to the rural sector. Recently declared government policy stances of assuring self-sufficiency in rice, should be looked upon with particular caution. Indeed, not only were policies along the lines of heavy government intervention in the 1970s unsuccessful, but such policies are particularly unviable in the current post-liberalisation environment. Most recent research on the sector emphasizes the key negative effects of politically powerful importers on the welfare of both consumers and local producers of rice (e.g. Diagne et al, 2003). In the context of imports flooding the country since liberalisation, any strategy to achieve self-sufficiency in rice should seriously take into consideration both the competition between local and foreign producers, and the potential for regulating the rice import sector.   Furthermore, given that those most affected by rising food prices are households in the intermediate ranges of the welfare distribution, who rely most on non-agricultural livelihood strategies, government effort in assuring productive non-agricultural employment should be considered a priority.