Policy responses to the food price crisis and their implications

Policy responses to the food price crisis and their implications The case of four Greater Mekong Subregion countries 12 OCCASIONAL PAPERS Knowledge for development effectiveness Enabling poor rural people to overcome poverty

OCCASIONAL PAPERS Knowledge for development effectiveness Policy responses to the food price crisis and their implications The case of four Greater Mekong Subregion countries by Mercedita A. Sombilla Research and Development Department Southeast Asian Regional Center for Graduate Study and Research in Agriculture Arsenio M. Balisacan School of Economics University of the Philippines Diliman 12 Donato B. Antiporta Southeast Asian Regional Center for Graduate Study and Research in Agriculture and Rowell C. Dikitanan Research and Development Department Southeast Asian Regional Center for Graduate Study and Research in Agriculture In collaboration with the Supreme National Economic Council, Cambodia (Ung Luyna and Ros Seilava); Department of Planning, Ministry of Agriculture and Forestry, Lao People s Democratic Republic (Oukham Phiathep); Thailand Development Research Institute, Thailand (Nipon Poapongsakorn); and An Giang University, Viet Nam (Nguyen Trih Khiem). The twelfth in a series of discussion papers produced by the Asia and the Pacific Division, IFAD Enabling poor rural people to overcome poverty

2011 by the International Fund for Agricultural Development (IFAD) The opinions expressed in this publication are those of the authors and do not necessarily represent those of the International Fund for Agricultural Development (IFAD). The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of IFAD concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The designations developed and developing countries are intended for statistical convenience and do not necessarily express a judgement about the stage reached by a particular country or area in the development process. All rights reserved ISBN 978-92-9072-278-6 Printed December 2011

Table of contents Acknowledgements 7 Acronyms 8 Foreword 9 Abstract 10 Introduction 11 I. Trends in international and domestic prices of rice 14 Price movements in various domestic markets during the food crisis 17 II. Impacts of increased food prices on the GMS economy 22 High rates of inflation 22 Impact on consumers 25 Impact on producers 26 III. Political economy of the food crisis in the GMS 33 Domestic supply control measures 33 Direct cash transfer or food subsidy to more vulnerable consumers 36 Supply enhancement measures to further arrest price increases 36 Thailand s pledging programme and rice exports 37 Some macroeconomic measures 38 IV. Lessons learned 39 V. Policy recommendations 41 Targeted social protection programme for vulnerable groups 41 Privatization of markets and reducing government intervention 42 Stimulating long-term production enhancement 42 Promoting regional cooperation on grain (rice) stocking 43 Promoting cooperation on information-sharing 44 International engagement and cooperation on competing demands for energy and food security 44 Areas for additional research 44 Annex A. Cambodia: Policy response to the food price crisis and its implications 46 Annex B. Food price crisis and implication in the Lao People s Democratic Republic 61 Annex C. Policy responses to the food price crisis and their implications: The case of Viet Nam 70 References 84 3

Figures 1 Cultivated rice area to total agricultural area 13 2 Trends in international domestic rice prices compared, 2000-2009 15 3 Monthly prices of domestic rice and export rice in Viet Nam, 2005-2009 15 4 Movement of world and domestic price of Thai rice, 2007-2008 16 5 Rates of rice price changes, 2001-2005 and 2006-2009 16 6 Market and real paddy price movements 21 7 Cambodian CPI, 2000-2009 23 8 Trend in fertilizer price 30 9 Rate of return of major crops 32 10 Influence of various domestic policies on international rice prices 34 A.1 Domestic prices of rice compared with international price of 25% broken rice 47 A.2 CPI and M2 52 A.3 Growth of CPI and M2 52 A.4 Growth of CPI and exchange rate 53 A.5 CPI and exchange rate 53 A.6 Growth of exchange rate and current budget balance 54 A.7 Growth of CPI and current budget balance 54 A.8 Growth of exchange rate and overall budget balance 55 A.9 Growth of CPI and overall budget balance 55 B.1 Monthly average rice price, 2006-2008 62 B.2 Monthly prices, by rice type, 2008-2009 62 C.1. Composition of Viet Nam s gross domestic product 71 C.2. Share of agriculture employment and foreign trade, 2000-2008 71 C.3 Trends in animal production in Viet Nam, 2000-2007 72 C.4 Fishery and aquaculture production in Viet Nam, 1986-2007 72 C.5 Composition of state investment in non-agriculture, agriculture and fishery sectors, 2000-2007 73 C.6. Trends in rice area, yield and production in Viet Nam, 1990-2009 74 C.7 Monthly prices of whole and milled rice in the Mekong Delta and Hanoi, 2004-2009 78 C.8 Export and rice export returns, 2000-2009 80 4

Tables 1 Price differentials between the world rice price and domestic prices 15 2 Prices received for rice sold and bought by Cambodian farmers during the food crisis 18 3 Rice prices: Retail in Phnom Penh and wholesale in nearby provinces, Cambodia 19 4 Rice prices in five provincial main markets (Vientiane Capital, Luang Prabang, Khammouane, Savannakhet and Champassack Provinces), 2007 and January- September 2008 19 5 Comparison of domestic prices by rice type in the Lao People s Democratic Republic 20 6 Rates of change of producer and retail prices of rice in Viet Nam during the food crisis 20 7 Mean and CV of the trend and cyclical components of price movement 23 8 Economic growth performance in the GMS 23 9 Consumer price index for the food group, Lao People s Democratic Republic, 2007 and 2008 23 10 Monthly inflation rates (general, low-income, rural), 2007-2008 24 11 Estimated effect of price rise on rice consumption 27 12 Rice surplus and rice deficit population in Thailand, 2006 27 13 Trends in producer prices of other food commodities 28 14 Annual changes in rice area cultivated and production 28 15 Median wages for day labour, Cambodia 30 16 Daily wages in rice purchases equivalent, Cambodia 31 17 Production, use and trade of rice in selected GMS countries 34 18 Intervention instruments used during the food crisis 34 A.1 Changes in domestic retail prices of key food commodities 48 B.1 Domestic fuel price trends, 2006-2008 63 B.2 Consumer price index, food group, 2007 and 2008 63 C.1 State investment in agriculture and non-agriculture sectors 73 C.2. Rice cropping area, production and yield, 1990-2009 74 C.3. Rates of increase in rice area, yield and production, 1990-2009 75 C.4. Distribution of rice farm size in the Mekong Delta and in Viet Nam as a whole, 2006 75 C.5. Shares of food expenditures 76 C.6. Distribution of farming and rice farming households 76 C.7. Rice supply and demand situation in Viet Nam, 2008-2009 76 C.8. Rates of increase in prices of farm products and farm inputs 78 C.9. Poverty impacts of food price increase 80 C.10 Total and agricultural trade value and share of agriculture in total trade, 2000-2007 81 5

Acknowledgements On behalf of the Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), we express our gratitude to IFAD through Thomas Elhaut for supporting this study and to Ganesh Thapa for his guidance at all its stages. We thank our co-investigators, Ung Luyna and Ross Seilava of the Supreme National Economic Council in Cambodia, Oukham Phiatep of the Ministry of Agriculture and Forestry in the Lao People s Democratic Republic, Nguyen Trih Khiem of An Giang University in Viet Nam and Nipon Poapongsakorn of the Thailand Development Research Institute in Thailand, who described country responses to the food crisis and analysed their impacts on both domestic and international markets. To the key officials in the countries we visited and from whom we gathered first-hand information to validate our findings, we extend our appreciation. Our thanks are also due to Rowell C. Dikitanan and Ruby H. Johnson of the Research and Development Department of SEARCA for their valuable research assistance, and to IFAD staff, primarily Valentina Camaleonte, who has tirelessly followed up the progress of the study and reminded us of deadlines. Thank you all. 7

Policy responses to the food price crisis and their implications Acronyms ADB Asian Development Bank ADF Agriculture Development Fund AFSIS ASEAN Food Security Information System AFTA ASEAN Free Trade Area ANR agriculture and natural resources ASEAN Association of Southeast Asian Nations ASEAN+3 ASEAN plus China, Japan and Korea B Thai baht BAAC Bank for Agriculture and Agricultural Cooperatives CDRI Cambodia Research and Development Institute CPI consumer price index CR Cambodian riel Vietnamese dong FAO Food and Agriculture Organization of the United Nations GDP gross domestic product GMS Greater Mekong Subregion IPSARD Institute of Policy and Strategy for Agriculture and Rural Development (Viet Nam) IRRI International Rice Research Institute KN Lao kip LPDR Lao People s Democratic Republic M money supply MAF Ministry of Agriculture and Forestry (Lao Poeple s Democratic Republic) MAFF Ministry of Agriculture, Forestry and Fisheries (Cambodia) MARD Ministry of Agriculture and Rural Development (Viet Nam) MEF Ministry of Economy and Finance (Cambodia) NCDM National Committee for Disaster Management NTBT non-tariff barriers to trade ODA official development assistance Q1-4 first, second, third and fourth quarters SPS sanitary and phytosanitary measures TFP total factor productivity WFP World Food Programme WTO World Trade Organization 8

Foreword Although food prices have been increasing globally since 2000, they increased at a faster rate from 2006 to 2007/08, when prices of major cereals surged rapidly. The countries of Asia and the Pacific also experienced these price spikes. Surges were due to a combination of both short-term factors (such as droughts, trade restrictions, and speculation and hoarding) and long-term ones (such as declining productivity, inadequate investment in infrastructure and linkages with other commodity markets, such as those for energy). In the region, prices of rice have been more volatile than those of wheat, because there are fewer rice exporting countries and less international trade in rice. Moreover, heavier regulation and protection in rice markets, compared with those for wheat, have favoured the price rise for rice. This study of four countries in the Greater Mekong Subregion (Cambodia, the Lao People s Democratic Republic, Thailand and Viet Nam) offers a rich and insightful analysis of the effects of the food price crisis on food producers, consumers and wage labourers, primarily regarding rice. More specifically, it discusses the impact of various policy measures adopted by the governments of these countries for domestic and international pricing; food production, particularly by smallholders; and nutritional and poverty levels. It confirms the negative impact in these countries of rising food prices on poor people s food intake and nutrition. However, it also highlights the benefits of rising food prices for households that depend on market agriculture, particularly in net food-exporting countries such as Thailand. The study offers a number of valuable lessons and policy recommendations for the formulation of appropriate policy responses to address similar crises that may occur in the future. We hope the findings will be useful to policy makers, development practitioners, academics and civil society. Ganesh Thapa Regional Economist Asia and the Pacific Division 9

Policy responses to the food price crisis and their implications Abstract The rapid rise of food prices in 2007-2008, dubbed the food crisis, forced country governments including those in the Greater Mekong Subregion (GMS) to adopt policy measures to reduce the transmission of higher international prices into domestic markets, and to protect the food security of vulnerable populations. This report discusses the impact of these measures on domestic and international prices, on food production (particularly by smallholders), and on the nutritional and poverty levels of four GMS countries Cambodia, the Lao People s Democratic Republic, Thailand and Viet Nam in order to gather valuable lessons learned and hopefully provide guidance on the formulation of appropriate policy responses to address similar or related incidences should these reoccur. The analysis focuses primarily on understanding the pressures experienced by the GMS economies as a result of the rice market crunch. The following key lessons were drawn from the results of the study: (i) Poor and vulnerable groups of people (e.g. poor urban and rural consumers, small producers who are net buyers of food, landless farmers, fishers, etc.) are those most affected by any crises, especially those involving increased food prices. (ii) Policies that restrict exports (export bans in Cambodia and Viet Nam and delayed releases of exports in Thailand) had limited impact in domestic markets, but caused great instability in the international market. Policies that raise prices and that poorly manage stocks encourage illegal activities and the proliferation of black markets, which have a huge fiscal cost. (iii) Updated market analyses and reliable commodity forecasts are needed to guide reactions to changing market conditions. (iv) Infrastructure and post-harvest facility improvements are needed to facilitate marketing of produce. Policy recommendations are the following: Development of targeted social protection programmes for vulnerable groups; Promotion of privatization of markets and reduction of government intervention; Stimulation of long-term production enhancement; Promotion of regional cooperation, especially on food (rice) stocking; Promotion of greater cooperation on technology and information-sharing and exchange; International engagement and cooperation on the competing demands for energy and food security. Key research areas: Commodity supply and demand studies; Supply/value-chain analysis of key export commodities; Strategies for the development and effective implementation of expanded regional trade and cooperation to promote sustainable agricultural growth. 10

Introduction Food prices started to rise in 2006, ending almost 25 years of real price decline. International prices of staple foods, such as rice and vegetable oil, doubled from January to May 2008. The upturn coincided with record petroleum and fertilizer prices. The effects of the dramatic swings in food prices experienced from 2007 to 2008 were felt around the world by everyone, except (possibly) the very wealthy. Almost everybody s standard of living was reduced as the middle class became increasingly careful about their food purchases, the near poor dropped into poverty, and poor people suffered even more. The impact on both consumers and producers was multifaceted, from struggling to increase household incomes to meet rising food expenditures to reallocating budgets at the expense of other basic necessities, primarily children s education. 1 Impacts on the wider economy came through increased inflation, accumulated external debt, changes in the balance of payments and rising unemployment, all of which led to social unrest and instability as countries food security and poverty status were threatened (Oakland Institute 2008; Brahmbhatt and Christiaensen 2008). There is no question, therefore, that the sharp rise in food prices over 2007-2008 represents the most serious shock to world food security in the previous two decades. As international food prices continued to increase in 2008, governments all over the world took measures to reduce the transmission of higher international prices into domestic markets, and to protect food consumption by vulnerable populations. As in other parts of the world, countries in the Greater Mekong Subregion (GMS) have adopted a number of policies in response to rising prices, including short- and medium-term measures: (a) market- and trade-oriented policy responses, such as restricting exports and reducing tariffs to control prices and/or increase domestic supply; (b) consumer-oriented policy responses that benefit consumers and vulnerable groups through food subsidies and social safety nets; and (c) producer-oriented policy responses to help farmers increase production through input subsidies and producer price support (Demeke, Pangrazio and Maetz 2009). This study aimed to assess the impact of these measures on domestic and international prices, on food production (particularly by smallholders), and on nutritional and poverty levels. The study team would then inform governments and other partners of the valuable lessons learned based on the experience of some countries in the GMS and hopefully provide guidance on the formulation of appropriate policy responses to address similar or related incidences should these reoccur. Analysis focused primarily on understanding the pressures experienced by Cambodia, the Lao People s Democratic Republic, Thailand and Viet Nam as a result of the rice market crunch. 1 IFAD, Soaring food prices and the rural poor: Feedback from the field (Rome: International Fund for Agricultural Development, accessed September 2010), www.ifad.org/operations/food/food.htm. 11

Policy responses to the food price crisis and their implications The specific objectives of the study were to: Document the policy measures adopted by four GMS countries to arrest the public anxiety created by significant escalation of rice prices, especially in 2007 and 2008; Assess the impact of these measures on domestic and international prices; on food production, nutrition and poverty levels, particularly of smallholder producers; and on long-term investment; Recommend appropriate policy measures to achieve the short-term goal of food price stability and the long-term goal of sustainable food production increases, especially by smallholder farmers in GMS countries; and Recommend investment strategies to achieve the long-term goal of sustainable food production increases in these countries. The present report consolidates the results of the four country studies (i.e. Cambodia, the Lao People s Democratic Republic, Thailand and Viet Nam) 2 commissioned to analyse the measures taken and policy responses to the food crisis within their national boundaries. Why the focus on rice? Agriculture in Asia, especially South-East Asia, is almost equated with rice. This crop accounted for about 61 per cent of total value of agricultural products in Cambodia in 2008, 47 per cent in the Lao People s Democratic Republic, 35 per cent in Thailand and 44 per cent in Viet Nam (FAOSTAT 3 ). The four countries combined paddy production of about 81 million tons in 2009 accounts for some 41 per cent of total production in South-East Asia, 13 per cent of the total in Asia and 11 per cent globally. 4 On average, cultivated rice area ranges from about 38 per cent (in the Lao People s Democratic Republic) to 77 per cent (in Viet Nam) of the total area cultivated from 2000 to 2009 (Figure 1). In the period of Viet Nam s doi moi (renovation), from 1990 to 1999, the share of planted paddy fields to total farm area reached about 92 per cent, from 6 million hectares in 1990 to 7.66 million in 1999. Rice farming is the main economic activity and hence the main source of people s livelihoods, especially in rural areas. The majority of agricultural workers, who constitute more than 50 per cent of the labour force of the countries, 5 are involved in rice and/or rice-based production activities, especially those in delta areas and in lowland plains and plateaux. Many are near-subsistence farmers, as in Cambodia and the Lao People s Democratic Republic. In Viet Nam, 64.3 per cent of the 14.5 million households (or 9.3 million households) are involved in rice production. 2 Commissioned country case studies are those for Cambodia, the Lao People s Democratic Republic and Viet Nam. Presentation of Thailand s experience is based on the personal accounts of Nipon Poapongsakorn (Poapongsakorn 2010a,b). 3 FAO, FAOSTAT FAO s online statistical database (Rome: Food and Agriculture Organization of the United Nations, 2010), http://faostat.fao.org (accessed September 2010). 4 The other big producers in Asia are China, India, Indonesia and Bangladesh, which together account for about 72 per cent of total regional production. 5 In Cambodia, agriculture accounts for about 64 per cent of total employed labour; the figure is 77 per cent in the Lao People s Democratic Republic, 40 in Thailand and 58 in Viet Nam. 12

Rice is also a key foreign exchange earner in Thailand and Viet Nam, the two major exporters of the commodity in the region. Cambodia is re-emerging in the world rice market; it is believed that some 0.5 million tons of milled rice are being exported informally across the border to Thailand and Viet Nam (Pandey and Bhandari 2010). Rice production in the Lao People s Democratic Republic, on the other hand, has primarily been for domestic consumption, because the country produces primarily a glutinous type. The importance of rice is not only based on its dominance in production, its being a key source of income to many rural people and a key export commodity (e.g. in Thailand and Viet Nam), but also on its being the major staple food of the population. Rice is considered the pillar of Asian food security and hence the focus of agricultural and food policy. Organization of the report The present report begins with a description of price movements during the food crisis and of the extent to which international price volatility has been transmitted to local economies. This is followed by a discussion of the impact of the food price rise on various sectors of the economy, particularly on small consumers and producers. It then proceeds to analyse the political economy of food, particularly in relation to the food crisis. This section stresses the fact that, in the GMS, it was not local supply/demand imbalances of this staple food that caused the rapid price hikes, but speculation by local constituents based on what was happening in the international market and the responses of the government to contain public anxiety. Finally, the report identifies lessons learned from this event, and concludes with some policy recommendations and suggestions on areas for further research. Figure 1 Cultivated rice area to total agricultural area (%) 100 80 60 40 20 0 Cambodia LPDR Thailand Viet Nam 1960s 1970s 1980s 1990s 2000s Source: FAOSTAT (see footnote 3). 13

Policy responses to the food price crisis and their implications I. Trends in international and domestic prices of rice The rise and fall of international and domestic prices were very much in consonance with each other. 6 Figure 2 compares trends in the international price of rice vis-à-vis the domestic prices in Cambodia, the Lao People s Democratic Republic, Thailand and Viet Nam. The steeper rise of the world price compared with domestic prices, especially from mid-2006, is partly explained by panic buying by importing countries, such as the Philippines, as temporary export bans were enforced by major rice suppliers, including India and Viet Nam, and by delayed release of Thai rice exports. The price spreads were maintained at narrow levels until 2007, when they widened significantly. These proportional differences of domestic and international prices in 2007 and 2008 (Table 1) were too large to be attributed to transport costs. As mentioned, prices fell in 2009 from their peak in 2008, but to levels that were much higher than their levels in early 2000. Figure 3 similarly compares the export price of Vietnamese rice with domestic prices in An Giang, the biggest rice producer in the Mekong River Delta area of Viet Nam, and in Hanoi, the biggest rice consumption centre in the North. The figures also show the widening gap between the export price and domestic prices during the food crisis period. The highest export price reached was US$838 per ton, a level that was much higher than those attained by domestic prices, which were US$474/ton in Can Tho and US$648/ton in Hanoi. 7 What is also interesting to note in Figure 3 is the consistently higher domestic price in the northern region (the Hanoi market, in particular) compared with the export price (quoted in the South), except for a short period of export price surge in April-May 2008, when a temporary restriction of rice exports was put in place. It has thus been argued that Viet Nam has been exporting some of its consumer welfare and subsidizing rice consumers in importing countries by exporting its rice at a price lower than that in the domestic market (Ngan 2010). In Thailand, the increase in domestic prices lagged behind that of the world rice price, as shown in Figure 4, which compares the trends of world and domestic wholesale prices of 100 per cent grade B Thai rice, both normalized to 1.0 in January 2007. At their peaks, the world price increased by about a factor of 3 in May 2008 from the January 2007 level, while the Thai domestic wholesale price increased by a factor of less than 2.5 in April 2008. The domestic rice market in Thailand is not a thin market compared with the world rice market, with its yearly supply allocation of 55-60 per cent from total production. Figure 5 shows average rates of rice price increases for the periods 2001-2005 and 2006-2009 in all four countries that validate the four observations on price movements discussed above. First, is the relatively more stable rice prices in 2001-2005 compared with those in the later years, when rice price increases were much larger. Second, is the 6 The relatively higher domestic prices in Cambodia compared with the world export price in the early 2000s is an aftermath of the long dry spell that occurred almost at the same time as the 1997/98 Asian financial crisis. 7 Viet Nam export prices typically correspond to world prices about two months earlier, as there is a lag between negotiation of the contract (when the price is set) and delivery of the rice. 14

Figure 2 Trends in international domestic rice prices compared, 2000-2009 700 600 500 400 300 200 100 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cambodia LPDR (PP, milled form) Thailand Viet Nam Export price (f.o.b.) Sources: FAOSTAT (see footnote 3) and AFSIS database (see footnote 20). Figure 3 Monthly prices of domestic rice and export rice in Viet Nam, 2005-2009 1000 900 800 700 600 500 400 300 200 2005 2006 2007 2008 2009 An Giang Hanoi Export price Source: Khiem 2010. Table 1 Price differentials between the world rice price and domestic prices Countries In US$/ton 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cambodia -44-58 -54-65 21 63 87 38 209 199 LPDR 28 11 32 28 51 90 90 80 364 - Thailand 19 15 13 14 15 9 10 22 82 61 Viet Nam 15 11-21 -14 16 27 39 1 149 111 Note: Estimated based on price data. Source: World Rice Statistics, IRRI; ASEAN Food Security Information System database. 15

Policy responses to the food price crisis and their implications much slower rates of increase in domestic prices compared with the world (export) price during the food crisis, which resulted in the huge gaps. Third, is the relatively small movement of prices in the Lao People s Democratic Republic (also shown in Figure 3), which can be attributed to the country s relatively limited participation in the global market to date. Fourth, is the relatively smaller rate of rice price increases in Thailand during the food crisis period, which is blamed on the rice pledging programme that delayed rice sales supposedly to stabilize domestic markets and prices. Figure 4 Movement of world and domestic price of Thai rice, 2007-2008 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sep 2007 2008 World price Domestic price Note: Using 100 per cent Thai rice as example. Data shown are normalized price setting to 1.0 on January 2007. Source: World price, IRRI Weekly Rice Price Update. Domestic price, Ministry of Commerce. Taken from Siamwalla and Somchai 2009. Figure 5 Rates of rice price changes, 2001-2005 and 2006-2009 (%) 100 80 60 63.3 86.1 67.6 63.7 67 76.2 82 40 20 32.6 33.1 0-5.6-20 Cambodia LPDR (PP, milled form) Thailand Viet Nam Export price (f.o.b.) 2001-2006 2006-2009 Note: Estimated based on price data. Source: FAOSTAT, accessed online; World Rice Statistics, IRRI: ASEAN Food Security Information System database 16

Price movements in various domestic markets during the food crisis Movements of local prices are described in this section. Table 2 compares the prices received by Cambodian farmers from the sale of their rice produce with the prices they paid for subsequent rice purchases during the crisis period. For Cambodia as a whole, the average price for rice produce increased by about 57 per cent from November 2007 to June 2008, varying widely across provinces, from a low percentage increase of 5 per cent in Siem Reap to a high percentage increase of 186 per cent in Preah Vihear. Data for some provinces, such as Takeo, however, showed prices received by farmers from the sale of rice produced declining slightly during that period. On the other hand, the average percentage increase of prices paid by farmers for rice purchases during the food crisis was much lower, at 18 per cent. These price changes similarly exhibited significant variability across provinces, and the spikes were even sharp for some provinces. In Kampong Speu, for example, a 180 per cent increase was recorded in February 2008 from 1,000 Cambodian riel (CR) in November 2007 to CR 2,800 and then dropping to an average price of CR 2,500 in June 2008. A similar trend was shown in Prey Veng, where average prices increased from CR 2,200 in November 2007 to a peak of CR 2,500 in February 2008 and then dropped to CR 2,200 in June 2008. Retail prices of rice across major markets in Cambodia exhibited significant variability as well, as can be noted in Table 3. The price of rice sold in the Phnom Penh markets increased from 90 per cent to 119 per cent from May 2007 to May 2008. Rice price increases in markets outside Phnom Penh which are closer to production areas ranged only from 75 to 99 per cent (CDRI 2008). Prices of high-quality rice (from Battambang, Kompong Speu and Kompong Chhnang) rose much more slowly compared with low-quality rice (Luyna and Seilava 2010). Two reasons explain this latter price movement: one relates to the fact that high-quality rice already had a relatively high price; and two, the demand shifts may have been in favour of the cheaper and lower-quality rice. The relatively more stable domestic market in the Lao People s Democratic Republic, even during the food crisis, accounts for the small price differentials across its provinces. Vientiane, like other capital markets, recorded the highest rice prices (Table 4). Luang Prabang, which ranks next to Vientiane as a popular tourist destination, also experienced rice price increases, but only slightly. Slight price decreases were observed in the Champassack and Savannakhet markets, on the other hand, owing to the availability of large stocks in the provinces as a result of the high cost of transport to major market centres and the temporary ban by local government on export of rice to other provinces in anticipation of a worsening world food crisis. The average price of glutinous and non-glutinous rice in the Lao People s Democratic Republic is compared for 2007 and 2008 in Table 5. The figures show relatively lower prices for both rice types in 2008 than in 2007. Also to be noted in Table 5 is the relatively lower price of glutinous rice compared with non-glutinous. Glutinous rice is the country s staple food and is not traded very much internationally. In Viet Nam, domestic prices experienced extreme volatility during the peak of the food crisis, sometimes doubling just over the course of a weekend and significantly falling to levels slightly higher than those prior to the rise. Table 6 shows this trend for both the paddy price (price received by farmers) and the milled rice price (retail price 17

Policy responses to the food price crisis and their implications Table 2 Prices received for rice sold and bought by Cambodian farmers during the food crisis (Cambodian riel [CR]) Province Nov- 07 Dec- 07 Jan- 08 Feb- 08 Mar- 08 Apr- 08 May- 08 Jun- 08 % change, Nov 07 to Feb 08 % change, Mar 08 to period shown available % change, periods available Farmgate price received by Cambodian farmers Banteay Mean Chey 600 630 620 650 1 000 975 1 000 8.3 0.0 66.7 Battambang 731 857 800 800 800 1 000 1 200 1 120 9.4 40.0 53.2 Kompong Cham 700 795 800 800 979 900 1 225 1 200 14.3 22.6 71.4 Kompong Chhnang 1 200 1 000 830 925 950 1 000 750-30.8-18.9-37.5 Kompong Speu 800 800 775 800 1 000 1 100 1 200 1 350 0.0 35.0 68.8 Kompong Thum 800 800 850 1 100 1 150 1 200 1 100 37.5-4.3 37.5 Kampot 800 850 900 900 1 000 1 200 1 200 1 350 12.5 35.0 68.8 Phnom Penh 1 000 1 000 1 700 900 1 700 1 300 1 300 70.0 44.4 30.0 Preah Vihear 700 675 700 1 250 1 300 2 000 2 000 78.6 53.8 185.7 Prey Veaeng 650 650 860 900 905 900 1 000 1 100 38.5 21.5 69.2 Siem Reap 1 000 650 925 900 700 950 1 000 1 050-10.0 50.0 5.0 Svay Rieng 600 600 700 800 1 000 800 1 100 33.3 10.0 83.3 Takeo 1 100 885 800 900 900 990 1 000-18.2 11.1-9.1 Oudor Mean Chey 525 769 700 800 715 800 1 000 780 52.4 9.1 48.6 Cambodia 750 800 800 900 950 1 000 1 100 1 175 20.0 23.7 56.7 Purchased price for milled rice by Cambodian farmers Banteay Mean Chey 2 000 1 800 1 800 2 500 2 600 2 500 2 800 2 800 25.0 7.7 40.0 Battambang 1 200 1 550 1 600 2 000 2 100 2 400 2 200 2 000 66.7-4.8 66.7 Kompong Cham 1 600 1 600 2 120 2 400 2 400 2 500 2 400 32.5 0.0 50.0 Kompong Chhnang 1 800 1 800 2 000 2 350 2 200 2 200 2 300 2 300 30.6 4.5 27.8 Kompong Speu 1 000 2 200 2 500 2 800 2 450 2 450 2 500 2 500 180.0 2.0 150.0 Kompong Thum 1 750 1 700 2 000 2 000 2 250 2 500 2 300 2 300 14.3 2.2 31.4 Kampot 2 200 2 000 2 000 2 200 2 200 2 300 2 300 2 500 0.0 13.6 13.6 Kandal 1 500 1 850 2 100 2 000 2 500 2 800 2 800 2 800 33.3 12.0 86.7 Kratie 2 150 2 500 2 250 2 500 1 800 2 500 2 500 2 650 16.3 47.2 23.3 Phnom Penh 1 800 1 800 2 000 2 500 2 800 3 100 3 200 3 000 38.9 7.1 66.7 Preah Vihear 1 500 1 750 1 750 2 000 2 500 2 000 2 000 2 350 33.3-6.0 56.7 Prey Veaeng 2 200 2 200 5 660 2 900 2 900 2 400 2 200 157.3-24.1 0.0 Rattanak Kiri 2 500 2 500 3 500 3 500 3 250 3 000 3 500 2 800 40.0-13.8 12.0 Siem Reap 1 600 1 600 2 100 2 350 2 400 2 500 2 500 2 500 46.9 4.2 56.3 Krong Preah Sihanouk 1 950 2 100 2 300 2 250 2 500 2 800 2 800 2 700 15.4 8.0 38.5 Svay Rieng 2 060 1 800 2 400 2 000 2 000 2 000-12.6-16.7-2.9 Oudor Mean Chey 2 200 3 000 2 250 2 750 3 000 2 500 2 500 2.3-9.1 13.6 Cambodia 2 200 1 900 2 000 2 200 2 500 2 600 2 500 2 600 0.0 4.0 18.2 Source: CDRI 2008. 18

Table 3 Rice prices: Retail in Phnom Penh and wholesale in nearby provinces, Cambodia Retail prices of milled rice in Phnom Penh, Cambodia (riel/kg) May-07 Nov-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Category 1 Somali or Pka Mlih from Battambang 1 870 2 029 2 050 2 236 2 892 3 299 3 548 Somali from Moung Russey 1 750 1 900 1 960 2 092 2 712 3 250 3 437 Category 2 Pka Knhei from Battambang 1 491 1 652 1 759 1 851 2 523 2 939 3 058 Pka Knhei from Moung Russey 1 445 1 610 1 650 1 810 2 387 2 900 2 950 Neang Khon from Battambang 1 349 1 587 1 674 1 747 2 289 2 811 2 900 Category 3 Neang Minh from Battambang 1 230 1 527 1 620 1 636 1 954 2 509 2 699 Pka Knhei from Takeo 1 283 1 500 1 620 1 640 2 050 2 500 2 650 Mixed from Moung Russey 1 200 1 467 1 600 1 612 2 025 2 400 2 400 Brown rice from Kompong Speu 1 185 1 457 1 500 1 525 1 887 2 267 2 450 Category 4 Banla Pdao 1 080 1 384 1 500 1 525 1 832 2 133 2 200 Average wholesale prices of paddy rice in nearby provinces, Cambodia (riel/kg) Jul-07 Nov-07 Jan-08 Mar-08 Apr-08 May-08 Jun-08 Mixed 654 736 762 1 022 1 058 1 324 1 159 IR 702 821 818 1 099 1 285 1 316 1 400 Neang Minh 621 666 775 1 027 1 085 1 070 Phkar Knhei 707 791 797 1 239 1 239 1 263 1 300 Somali 845 846 970 1 311 1 333 1 390 1 480 Source: MAFF. Table 4 Rice prices in five provincial main markets (Vientiane Capital, Luang Prabang, Khammouane, Savannakhet and Champassack Provinces), 2007 and January- September 2008 Provinces Rice prices (kip/kg) Jan-Jun 2007 Jul-Dec 2007 Jan-Jun 2008 Jul-Sep 2008 Vientiane 4 229 4 900 5 400 6 000 Luangphrabang 3 967 4 300 4 167 4 700 Savannakhet 3 950 5 167 4 075 3 967 Khammoune 3 667 4 333 4 967 4 117 Champasack 3 506 3 989 3 933 3 683 Average of five markets 3 810 4 365 4 378 4 493 Source: Department of Domestic Trade, Ministry of Industry and Commerce. 19

Policy responses to the food price crisis and their implications Table 5 Comparison of domestic prices by rice type in the Lao People s Democratic Republic (Paddy and milled forms kip/kg) Glutinous Non-glutinous 2007 2008 2007 2008 Type/form Paddy form Lowest 1 000 1 000 1 500 1 500 Highest 2 300 2 500 4 160 3 300 Prevailing 2 000 1 500 2 000 2 500 Average 1 906 1 481 2 670 2 304 Milled form Lowest 2 000 2 000 2 000 2 000 Highest 7 000 5 000 8 000 8 000 Prevailing 4 000 3 000 8 000 4 000 Average 3 972 3 031 5 676 4 621 Source: Charts 10.1 and 10.2 of FAO and MAFF 2009. Table 6 Rates of change of producer and retail prices of rice in Viet Nam during the food crisis Period Average paddy rice (US$/ton) Average price of milled rice in paddy equivalent (US$/ton) Paddy rice price growth rates (%) Milled rice price growth rates (%) Can Tho Hanoi Can Tho Hanoi Can Tho Hanoi Can Tho Hanoi Jan-Jun 2006 1 957 2 605 2 308 3 071 5.7 0.0 5.7 0.0 Jul-Dec 2006 2 127 2 615 2 508 3 083 9.5 12.9 9.5 12.9 Jan-Jun 2007 2 606 2 956 3 072 3 485 7.8 2.0 7.8 2.0 Jul-Dec 2007 2 916 3 260 3 438 3 844 15.5 25.0 15.5 25.0 Jan-Jun 2008 4 952 5 729 5 275 6 018 65.0 63.1 56.2 62.6 Jul-Dec 2008 4 539 5 544 5 544 5 882-20.2-7.9-13.8-24.2 Jan-Jun 2009 4 544 5 649 5 481 5 753 0.9-0.5-3.7-0.6 Jul-Dec 2009 4 420 4 778 5 439 5 663 35.6 41.7 15.1 30.0 Source: Khiem 2010. Table 7 Mean and CV of the trend and cyclical components of price movement Paddy 25% 1984-1991 1992-2000 2001-2008 Constant price Mean 9 200 7 439 6 711 Std 1 003 915 771 CV 10.9 12.31 11.48 Market price Mean 8 847 6 831 7 207 Std 706 1 009 1 480 CV 7.98 14.77 20.54 Source: Estimates by the Office of Agricultural Economics. 20

Figure 6 Market and real paddy price movements (Paddy is 5% broken) 12 000 10 000 8 000 6 000 4 000 2 000 0 Constant price Market price Source: Office of Agricultural Economics. in paddy equivalent) in the provinces of Can Tho and Hanoi. The price difference between the two areas is attributable to the fact that Can Tho is a major production area (as is An Giang) in the Mekong River Delta, while Hanoi is a major consumption centre. All price increases peaked during the period from January to June 2008 and fell drastically in the two semesters that followed (July to December 2008 and January to June 2009). The table also indicates the relatively faster rate of increase of the producer price compared with the rate of increase of the milled rice price, especially in Can Tho. Domestic price movements in Thailand have been primarily influenced by the seasonality of production and the pledging programme of the government. In real terms, paddy prices reached a trough in 2001, after which they began an upward trend before soaring to a 25-year high during the crisis (Figure 6 and Table 7 of Poapongsakorn 2010a). They were most volatile during the period 2001-2008, with their coefficient of variation higher than that in 1984-1991 and 1992-2000. The volatility that started in 2001 and became worse in 2007-2008 was attributed more to the government s rice pledging policy. The Thai Government s retaining of pledged rice the share of which has become much bigger than those handled by private traders creates a tightening of rice supply that leads to a rise in prices. This supply tightening in April 2008 (April is the rice harvesting month and rice pledging takes place at about this time) worsened the food crisis. 21

Policy responses to the food price crisis and their implications II. Impacts of increased food prices on the GMS economy With the onset of peace in the 1990s, the people in the Greater Mekong Subregion started to experience rapid changes and improvements in their living standards and conditions. This is exhibited in the relatively robust performance of their respective economies (Table 8). With the exception of Thailand, GMS countries exhibited economic growth rates far higher than the average for South-East Asia, both in total gross domestic product (GDP) and in per capita terms. The relatively huge growth rates in their industrial and service sectors indicate modernization and industrialization, as they emerge from subsistence to more diversified and more open market-based economies. In parallel with these development activities are the growing commercial relations among GMS countries, notably in terms of cross-border trade, investment and labour mobility. However, despite the significant economic growth, great portions of these countries populations remain poor. The average per capita GDP in 2009 at current international dollars remains meagre US$2,152 for Cambodia, US$2,264 for the Lao People s Democratic Republic and US$2,992 for Viet Nam compared with their more prosperous East Asian neighbours, particularly Malaysia, Singapore and Thailand (ADB 2009). The proportion of populations living below their respective national poverty lines varies from a high 35 per cent in Cambodia to a low of 9.6 per cent in Thailand. 8 In terms of numbers, about 500,000 households in the Lao People s Democratic Republic are estimated to be suffering permanent food insecurity, with serious consequences for child undernutrition. Viet Nam s poor and food insecure people are estimated at 11.8 million, while Cambodia s estimate is 4 million. Even Thailand, which has had quite significant economic growth, still reports about 6.4 million people as poor and undernourished. As in other developing countries, the reported poor and undernourished people in these GMS countries are primarily landless or land-poor farming households, fishers, daily casual labourers and households headed by women in rural areas. A sharp rise in food prices is critical to these people, be they producers or consumers. High rates of inflation High global and domestic food prices always translate into rapid growth of consumer price inflation that affects consumer purchasing power and becomes critical among poor people. The trends of price inflation in the four GMS countries follow. Cambodia s consumer price index (CPI) started to rise slowly from 2000, when the country s economy showed signs of expansion (Figure 7). From the first quarter (Q1) of 2001 to Q1 2007, CPI increased 22.2 per cent, or a monthly rate of 0.31 per cent. These monthly rates of increase became significantly larger from then on, averaging 1.41 per cent in Q2 2007 to 4.15 per cent in Q1 2008 and 3.75 in Q2 2008. 8 In terms of the international measure that uses the US$1.25 per day benchmark, the proportion of the population considered poor is: 40.2 per cent for Cambodia; 44 per cent for Lao People s Democratic Republic; <2 per cent for Thailand; and 21.5 per cent for Viet Nam. 22

Figure 7 Cambodian CPI, 2000-2009 200 150 100 50 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Trans. & com. Medical care Furn. & housing Housing & utilities Clothing & footwear Food, beverages & tobacco CPI (all items) Source: Reported in the Cambodia study (Annex A). Table 8 Economic growth performance in the GMS (Averages of the years indicated, %) Countries Real GDP Real GDP per capita Agriculture Industry Services 1995-99 2000-05 2006-08 1995-99 2000-05 2006-08 1995-99 2000-05 2006-08 1995-99 2000-05 2006-08 1995-99 2000-05 2006-08 South-East Asia 4.8 6.3 5.9 2.6 4.5 3.9 2.9 4.1 3.1 7.0 8.4 5.8 5.0 7.1 7.6 Cambodia 7.0 9.2 9.2 2.6 7.7 7.8 3.8 4.2 5.4 13.5 16.8 10.3 8.0 10.0 9.7 LPDR 6.4 6.3 7.9 4.8 4.1 5.6 4.8 2.0 4.4 11.2 8.7 9.6 7.7 9.8 9.5 Thailand 1.5 5.1 4.2 0.5 4.2 3.3 1.7 3.3 3.8 2.5 6.2 4.9 0.7 4.4 3.6 Viet Nam 7.5 7.4 7.6 5.9 6.0 6.3 4.4 4.0 3.9 11.3 10.2 8.9 6.6 6.7 8.1 China 9.1 9.4 11.2 8.1 8.7 10.6 4.0 3.7 4.7 10.7 10.5 12.3 9.5 10.1 11.8 Source: ADB 2009. Table 9 Consumer price index for the food group, Lao People s Democratic Republic, 2007 and 2008 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 110.8 111.1 111.6 112.7 112.8 113.9 115.5 117.7 119.3 119.5 118.0 115.9 2008 117.5 119.3 121.8 125.4 128.5 129.8 130.4 134.2 134.1 131.1 - - Note: December 2005 = 100. Source: Ministry of Planning and Investment 2007 information from official statistics; 2008 information from unofficial statistics. 23

Policy responses to the food price crisis and their implications Table 10 Monthly inflation rates (general, low-income, rural), 2007-2008 Year Month General inflation Low-income inflation Rural inflation All Food Non-food All Food Non-food All Food Non-food 2007 Jan 3.1 6.3 1.1 4.1 7.1 1.4 5.1 10.1 0.6 Feb 2.3 5.2 0.5 3.2 5.7 0.9 4.6 9.5 0.5 Mar 2.0 3.8 1.0 2.6 4.1 1.2 3.7 6.7 1.0 Apr 1.8 3.3 0.9 2.4 3.7 1.0 3.4 5.7 1.3 May 1.9 3.9 0.5 2.5 4.3 0.8 3.6 6.2 1.3 Jun 1.9 5.3 0 2.9 5.9 0.2 5.0 9.9 0.5 Jul 1.7 5.0-0.3 2.5 5.5-0.1 4.3 8.8 0.4 Aug 1.1 4.3-0.7 2.0 4.7-0.4 3.5 7.6-0.2 Sep 2.1 3.8 1.1 2.4 4.1 0.9 4.8 7.7 2.1 Oct 2.5 2.6 2.3 2.4 2.9 1.8 3.3 3.1 3.5 Nov 3.0 2.6 3.2 2.7 2.8 2.5 3.5 2.5 4.6 Dec 3.2 2.8 3.5 2.8 2.6 2.8 4.1 3.3 4.8 2008 Jan 4.3 4.8 3.9 3.9 4.6 3.2 6.3 7.1 5.6 Feb 5.4 7.9 4.0 5.7 8.2 3.4 7.8 10.1 5.7 Mar 5.3 7.8 3.8 5.6 8.2 3.2 7.8 10.5 5.2 Apr 6.2 9.8 3.9 7.2 11.3 3.2 11.2 17.6 5.0 May 7.6 11.8 5.1 8.7 13.4 4.2 16.1 26.3 6.3 Jun 8.9 11.4 7.2 9.2 12.6 5.9 13.4 18.1 8.9 Jul 9.2 11.8 7.6 9.7 13.1 6.3 13.7 18.2 9.3 Aug 6.4 14.3 1.4 7.8 15.5 0.4 10.6 18.6 3.0 Sep 6.1 15.7 0 8.0 16.9-0.5 10.1 19.3 1.3 Source: Ministry of Commerce. From Siamwalla and Somchai 2009. Monthly rates of increase slowed down drastically from Q3 2008 through Q1 2009 and accelerated a bit in Q2 and Q3 of that same year before stabilizing at an average level of 161.3 in Q4 2009, a level that is much higher than those achieved in 2006 or 2007. As can be further noted in Figure 7, the price indices for the food, beverages and tobacco group of commodities rose most rapidly, from some 124 per cent per month in Q1 2007 to about 190 in Q4 2009. This was followed by the price index of the transportation and communication commodity group. The consumer price indices in the Lao People s Democratic Republic similarly increased, but the rates of increase were not as high as those experienced in the other GMS countries studied. The highest price index reached was 134 per cent in August- September 2008, which is a 34 per cent increase from the prices in 2005 or an average of only about 0.75 per cent growth rate per month (Table 9). The price indices seem to have started a descent from October 2008. Inflation rates in Viet Nam were 12.6 per cent in 2007 (or about 1 per cent per month) and 25 per cent in 2008 (or about 2.1 per cent per month). Food price increases were a primary contributor to the rise in inflation rates. In 2007, the price of staple foods (primarily rice) increased 14.5 per cent, while the price of food, generally, increased 19.5 per cent. 24

The rise in Thailand s CPI in 2007-2008 was also attributed to the rise in both food and fuel prices. Table 10 shows that the rapid rise in food inflation, particularly in rural areas, picked up in early 2007. Non-food inflation accelerated in the last quarter of 2007, causing increases in overall inflation for all groups of households. The relatively higher inflation in rural areas is also clear compared with that of the general CPI, which covers both average urban and rural households. For example, the rural inflation rate reached the annualized rate of 16.1 per cent in May 2008, compared with the 7.6 per cent rate of increases for the general CPI. Impact on consumers There are two key reasons why poor people are vulnerable to surging and volatile prices. One is that they spend a substantial amount of their income on purchased food. Food expenditure accounts for almost 53 per cent of total household expenditure in Viet Nam. In Cambodia, the proportion is 64 per cent. The share of household food expenditure to total expenditure in the Lao People s Democratic Republic would not be too far off from those of Viet Nam and Cambodia. In Thailand, the proportion is about 34 per cent for all households and slightly higher (39 per cent) for those in rural areas (Isvilanonda 2008). The country s 2007 socio-economic survey reported that the proportion of food expenditure to total expenditure among the poorest households in rural areas (estimated at 88.7 per cent of poor people or roughly around 5.4 million) was as high as 55 per cent. This should have greatly reduced poor people s food consumption level. But a study by Siamwalla and Somchai (2009) showed that while poor rural people were hit hard by food inflation, surprisingly their food consumption was not reduced, as the price elasticity of their demand for food is unitary. 9 This behaviour may not be the same in other countries such as Cambodia, the Lao People s Democratic Republic and Viet Nam that exhibit positive expenditure elasticity and negative own price elasticity. Rice elasticity parameters in Viet Nam, for example, are estimated at 0.36 and -0.8 for expenditure elasticity and for own price elasticity, respectively. The latter parameter means that a 1 per cent increase in the price of rice will reduce consumption of the commodity by 0.8 per cent, while a 1 per cent increase in income/expenditure leads to a 0.36 per cent increase in rice demand. 10 Applying the price elasticity parameter (i.e. -0.8 price elasticity) to determine the impact of the food price increase on rice consumption during the crisis indicates a reduction in consumption from about 11 per cent to almost 43 per cent, which yields a per capita consumption level ranging from 87.4 kg in Cambodia to 135.4 kg in the Lao People s Democratic Republic. The effect of positive expenditure elasticity is subdued not only by the magnitude of the price effect, but also by the fact that higher prices translate to lower real income. Vu and Glewwe (2009) indeed show that price increases of 50 per cent or more raise the poverty incidence by about 3 percentage points in Viet Nam. Another study by Ivanic and Martin (2008) similarly estimated that a 50 per cent rise in rice price in Cambodia translates into a poverty incidence that increases by 2.5 percentage points. 9 That is, a percentage change in the price of a commodity would result in the same percentage change in quantity demanded. 10 In the more prosperous countries, such as Thailand, these elasticities vary greatly by income class and rice quality. Isvilanonda (2008) estimated a negative income elasticity for rice in the upper income bracket. But good-quality rice has positive income elasticity, since it is important in the diet of high-income households. 25