Enabling Environment for Managing Rice Risk

C. Peter Timmer

Risks in the extended rice value chain are the greatest single threat to global food security, significantly outweighing drought in the American Midwest or disease threats to wheat. Two-thirds of the world’s poorest and most food insecure households grow and/or consume rice as their staple food. Rice is increasingly the food of the poor and thus is the fulcrum of global food security. And the risks facing the world rice economy are many and varied—from uncertainties over fertilizer supplies, water availability or the quality of seed, to financing arrangements for procuring, storing, processing and transporting the grain, to the price facing farmers when they sell and consumers when they buy it in retail outlets.

Most governments where rice is an important crop and food staple recognize the significance of these risks, and nearly all governments in Asia intervene into the functioning of the rice value chain.[1] Maintaining reasonably stable rice prices for domestic consumers has been a long-standing concern of governments, but providing incentive prices to farmers, ensuring timely delivery of fertilizer, designing, building and maintaining large-scale irrigation systems, and promoting rural financial systems that are accessible to smallholder farmers and traders have also been major roles for governments. For traditional open-pollinated rice varieties, most of the research and development of new seed technologies has been a public responsibility, usually shared between the global research centers such as IRRI, and national agricultural research centers. Building genetic resilience to pest, disease and weather-related risks while growing rice, has long been a priority of these centers.

All of these activities have the potential to mitigate risks in the rice value chain, or to help farmers, traders and consumers cope with actual risks as they materialize. But good intentions do not always lead to good results, and government efforts to reduce risks for farmers or consumers can end up raising them, often with disastrous results. This is usually because government interventions often fail to consider their full impact on the very markets they seek to influence.

For example, markets are needed for farmers to connect to input suppliers in one direction and to consumers in the other. But in a market economy (the only kind of economy with a successful track record of raising labor productivity, and hence living standards, over many generations), markets actually play three key roles: First, and the one often stressed in the development literature, they play an “engineering” role by moving inputs to farmers and food to consumers. Even socialist, planned economies had to use markets in this role, although prices did not play a coordinating role (and hence did not add to the risk of farming).

But there are two deeper roles for markets that provide market economies their distinguishing strengths (and often harsh outcomes). First is the role of markets in price discovery—what is a commodity (or service) “worth” in monetary terms? These terms dictate the rate of exchange and determine such important values as the price of rice or of wages for unskilled labor. Price discovery is about scarcity, the distribution of incomes, and who gets what. The outcome from this role is a critical part of the “enabling environment” in all economies. When the prices are highly unstable, they create serious risks throughout the rice system.

But finally, markets serve as the arena for allocating society’s scarce resources to meet the virtually unlimited needs and desires of consumers. This allocation process, when joined to reasonably efficient price formation, is the reason market economies have outperformed other forms of economic organization over the long haul. Efficiency in resource allocations is simply critical to raising economic output in a sustainable fashion, and thus to reducing poverty and hunger.

Reducing risks in the Asian rice economy will depend fundamentally on understanding these three roles of markets, and using government interventions very carefully through rice markets to stabilize the price environment for farmers and consumers. It would be nice to be smart enough and knowledgeable enough to know what needs to be done, and thus able to tell a competent government what to do, but I do not believe we can “plan” our way out of the risks facing farmers and consumers by making markets do our will. The trick, and only a few countries have managed it smoothly, is for government policy and markets to work together to bring poor households into a growing economy that is based on a productive, sustainable and stable food system. Only then can we end hunger, and keep it ended.

References

Reardon, Tom, Kevin Z. Chen and Bart Minten. 2012. The Quiet Revolution in Staple Food Value Chains in Asia: Enter the Dragon, the Elephant, and the Tiger. Manila: Asian Development  Bank, and forthcoming,  International Food Policy Research Institute, Washington, DC.