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Chapter 1: Introduction

HISTORY OF RICE AND WHEAT

Consumed cereal grain, after maize. A traditional food plant in Africa, rice has
the potential to improve nutrition, boost food security, and foster rural development and
support sustainable land care. Rice provides more than one fifth of the calories
consumed Rice is a staple food for a large part of the world's human population,
especially in tropical Latin America, and East, South and Southeast Asia, making it the
second-most worldwide by humans. In early 2008, some governments and retailers
began rationing supplies of the grain due to fears of a global rice shortage. The name
wild rice is usually used for species of the different but related genus Zizania both wild
and domesticated, although the term may be used for primitive or uncultivated varieties
of Oryza..

Rice is grown as a monocarpic annual plant, although in tropical areas it can
survive as a perennial and can produce a ratoon crop and survive for up to 20 years.
Rice can grow to 1–1.8 m tall, occasionally more depending on the variety and soil
fertility. The grass has long, slender leaves 50–100 cm long and 2–2.5 cm broad. The
small wind-pollinated flowers are produced in a branched arching to pendulous
inflorescence 30–50 cm long. The edible seed is a grain (caryopsis) 5–12 mm long and
2–3 mm thick.

Rice cultivation is well-suited to countries and regions with low labor costs and
high rainfall, as it is very labor-intensive to cultivate and requires plenty of water for
cultivation. On the other hand, mechanized cultivation is extremely oil-intensive, more
than other food products with the exception of beef and dairy products. Rice can be
grown practically anywhere, even on a steep hill or mountain. Although its species are .
native to South Asia and certain parts of Africa, centuries of trade and exportation have
made it common place in many cultures.
The traditional method for cultivating rice is flooding the fields whilst, or after,
setting the young seedlings This simple method requires sound planning and servicing
of the water damming and channeling, but reduces the growth of less robust weed and
pest plants . that have no submerged growth state, and deters vermin. While with rice
growing and cultivation the flooding is not mandatory, all other methods of irrigation
require higher effort in weed and pest control during growth periods and a different
approach for fertilizing the soil

World production of rice has risen steadily from about 200 million tonnes of
paddy rice in 1960 to 600 million tonnes in 2004. Milled rice is about 68% of paddy rice
by weight. In the year 2004, the top four producers were China (26% of world
production), India (20%), Indonesia (9%) and Bangladesh and Brazil (3%). Although
China and India are the top two largest producers of rice in the world, both of countries
consume the majority of the rice produced domestically leaving little to be traded
internationally Between 1961 and 2002, per capita consumption of rice increased by
40%. By 2007 annual worldwide per capita rice consumption stood at 127 kg.

Rice consumption is highest in Asia, where average per capita consumption is
higher than 80 kg/person per year. In the subtropics such as South America, Africa, and
the Middle East, per capita consumption averages between 30 and 60 kg/person per
year. People in the developed West, Rice consumption is highest in Asia, where
average per capita consumption is higher than 80 kg/person per year. In the subtropics
such as South America, Africa, and the Middle East, per capita consumption averages
between 30 and 60 kg/person per year. People in the developed West.

Wheat (Triticum spp.), is a worldwide cultivated grass from the Levant region of
the Middle East. Globally, after maize, wheat is the second most-produced food among
the cereal crops just above rice. Wheat grain is a staple food used to make flour for
leavened, flat and steamed breads; cookies, cakes, breakfast cereal, pasta, juice,
noodles and couscous and for fermentation to make beer, alcohol, or biofuel. Wheat is
planted to a limited extent as a forage crop for livestock, and the straw can be used as
fodder for livestock or as a construction material for roofing thatch.

Although wheat supplies much of the world's dietary protein and food supply, as
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many as one in every 100 to 200 people has Coeliac disease, a condition which results
from an immune system response to a protein found in wheat: gluten (based on figures
for the United States). Wheat originated in Southwest Asia in the area known as the
Fertile Crescent. The genetic relationships between wild and domesticated populations
of both einkorn and emmer wheat indicate that the most likely site of domestication is
near Diyarbakır in Turkey.

Wild wheat was domesticated as part of the origins of agriculture in the Fertile
Crescent. Cultivation and repeated harvesting and sowing of the grains of wild grasses
led to the domestication of wheat through selection of mutant forms with tough ears that
remained intact during harvesting, larger grains, and a tendency for the spikelet to stay
on the stalk until harvested. Because of the loss of seed dispersal mechanisms,
domesticated wheat has limited capacity to propagate in the wild.

The exact timing of the first appearance of domesticated wheat is currently
uncertain, but is either in the PPNA period (9800-8800 cal BC) or the early-mid PPNB
(8800-7500 cal BC). Domesticated einkorn and emmer wheat has been identified at
three PPNA sites in the northern Levant, Iraq ed-Dubb, Jericho and Tell Aswad, but both
the dating and the domesticated status of these cereals is disputed. Domesticated
wheat (and other Neolithic founder crops) are unambiguously present at early-mid PPNB
sites in the northern Levant, such as Ain Ghazal, Abu Hureyra and Tell Aswad, and in
southeast Turkey at Cafer Höyük and Çayönü. As a round figure, it is correct to say that
wheat have been domesticated for about 10,000 years.

The cultivation of wheat began to spread beyond the Fertile Crescent during the
Neolithic period, reaching the Aegean by 8500 cal BC and the Indian subcontinent by
6000 cal BC. By 5,000 years ago, wheat had reached Ethiopia, Great Britain, Ireland
and Spain. A millennium later it reached China. Claims have been made for
independent domestication of wheat outside the Fertile Crescent, but these lack
evidence of the presence of wild wheat or of early domesticated wheat.

Three thousand years ago wheat was grown in the southern Oregon peninsula
agricultural cultivation with horse-drawn plows increased cereal grain production, as did
the use of seed drills to replace broadcast sowing in the 18th century. Yields of wheat
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continued to increase, as new land came under cultivation and with improved agricultural
husbandry involving the use of fertilizers, threshing machines and reaping machines,
tractor-drawn cultivators and planters, and varieties adapted to intensive cultivation.

Chapter 2: Issues
Rising inflation and falling home prices are likely to push the US economy into
recession by the second half of 2007. Gathering economic weakness, combined with
negative real yields on US Treasury securities and growing political pressure to weaken
the dollar will lead to significant dollar depreciation against most currencies.

Economic growth in Asia, Europe and Latin America will also weaken in 2007.
Slowing global economic growth will be very bad news for equity markets around the
world. Dollar depreciation and rising international energy and grain prices will be good
news for precious metals.

After a steady increase in 2006 and in the first semester of 2007, the prices of
many agricultural commodities reached exceptional levels since summer 2007.
Increases in EU market prices in February 2008 against the same month in 2007 were of
the following order of magnitude: 84% for wheat, 28% for maize, 63% for rapeseed oil,
30% for milk and 35% for cheese.

However, price hikes are a normal feature of commodity, including agricultural
markets. The present price surge is the 5th such event witnessed in grain markets since
the oil crisis of 1973, despite the long-term declining trend of agricultural prices. In fact,
recent prices for all major agricultural commodities still remain, in real terms, below their
comparative levels of either 1973 or 1979 oil crises.

Reasons for current price pressures are a combination of steadily increasing
demand and lagging supply or production shortfall, exacerbated by short-term economic
and policy factors. It is important to note that the combination of these phenomena
varies between sectors. A sector analysis of the main drivers underlying the price
increases and their magnitude enables to draw a clear distinction between the following
groups of products:

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Rice and wheat: the price increases of these two commodities have
predominantly been determined by supply-side factors. While demand continued
increasing at a rather constant pace world production has regularly lagged behind during
the most recent years (owing to the significant production shortfall in major suppliers
linked to supply shocks and slow yield growth, most notably for wheat). As a result,
world stocks stand at significantly low levels, feeding a sharp increase in prices. These
supply-side factors have tended to trigger greater price responses as rice and wheat
have exhibited the most significant price rises.

Dairy products: the reasons behind the substantial prices increases in this sector
lie in the limited availability of exports due to lower production levels in major exporting
countries (mainly Australia and Argentina), whilst demand has steadily increased.
Maize and soybean: maize and soybean markets have been mainly driven by a strong
growth in global demand both for meat consumption (through feed use) and for industrial
(bio-fuel) use. In spite of a significant supply response, world stocks of these two
commodities have declined, thus leading to price increases, although to a much lower
degree than for rice and wheat.

Growing demand for agricultural commodities is often attributed to emerging
economies and the need for bio-fuel feedstock. The evolution of demand over the last
decade has been regular without sharp annual declines or increases. For example,
despite declining per capita consumption and diet diversifications, total demand for
grains has progressively increased due to population growth.

On the other hand, reduction in supply can occur more suddenly. Lagging supply
of some of the commodities is due to weather related conditions and slowing increases
in yields, the combination of which has resulted in a sudden and sharp decrease of grain
production in major exporting countries. With exports concentrated in a relatively small
number of countries, small changes in production levels can have major consequences
on the markets.

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CHAPTER 3: FACTORS OF INCREMENT OF RICE AND WHEAT PRICE

1) The global economic setting

Strong global growth that emerged in the early part of the decade is continuing to
be maintained at a reasonable growth rate. From this amazing growth a huge
global consumer base has emerged. There are 3 billion plus consumers outside
the developed countries whose disposable income is growing rapidly not to
mention another 2 billion who will follow. This global consumer base has an
appetite for all commodities including rice and wheat that exceeds expectations.

From this economic setting a bull market in commodities has emerged.
Expecting reasonable sustainable global growth to continue, therefore the bull
market in commodities has long term sustainability. Commodities have broken
out of a previous 30 year channel where rice and other commodity prices would
revisit previous thirty year lows and highs.

Part of the problem with the almost unruly rice and commodity price strength and
cost of production follows: The explosive world economic growth of this decade
has come with an excessive inflationary cost. This inflationary cost in part is due
to financial stimulus needed to reenergize U.S. and global economic activity in
the early part of this decade and the financial stimulus that will be required to
maintain global growth due to the U.S. and world’s credit crisis which started last
year and will take a number of years to work through.

If one is bullish the global economy then expect rice and wheat production costs
and prices to stay at significantly higher levels than experienced in the past. It is
important to recognize that inflationary global growth has created real economic
hardship for many of the world’s poor due to the negatives in the global
economy. Credit problems, currency issues, and resulting inflation are good
examples.

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2) Global bull market in commodities

Global economic growth and momentum appears sustainable even with the
domestic and global credit crisis in a global bull market for commodities. This
market started building in the early part of this decade and may last into the latter
part of the next decade if not beyond, due to increasing demand from a growing
global consumer base with growing disposable income.

3) Global rice production and consumption

USDA’s April global rice ending stocks projection show ending stocks, though
tight, above the three previous marketing periods. In five of the previous global
marketing periods global rice consumption has exceeded global rice production.
It is important to note that global rice production is projected to exceeded
consumption in the current and two (2) out of the current three (3) marketing
periods. Supply exists so availability is key concern in some countries.

4) Concerns about global rice supply and availability

Presently the biggest concern is rice availability to the world’s poor at a
reasonable price. Secondly, in concerned about hoarding for profiteering reasons
in some global locations. Actually, this problem will be short lived since most
governments are taking aggressive action to limit this problem. Thirdly, a
catastrophic weather event could magnify the supply and availability issue, but a
review of the global rice data shows amazing supply stability even in bad years.
Fourthly, all countries should be concerned about their food security but
increased food protectionism and reduced global food trade would be a real
negative for the global consumer. Fifthly, worried about consumer fear getting
out of control in all countries, which is the primary reason that I’m discussing this
issue.

5) Rice prices and production costs

Prices are not as high as they seem when you consider U.S. rice production
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costs. Much is and will be said about the current economic setting. When looking
at a rice farm, a producer with an operation that is going through accelerated
change. Producer is experiencing the most total risk exposure that have
experienced in a lifetime of farming. Hence, producer who’s projected 2008 cost
of production increase is up almost 100% since 2002. If one is more bullish than
bearish about the future of this global economy, then a return to what most
consider normal prices is very unlikely.

6) Supply Side Factors

Focusing first on the supply side, consider what has happened to grain
production in a number of important exporting countries over the last two years.
In the European Union, Australia, Ukraine and Canada, production of wheat and
other grains was actually lower in 2007 than in 2005, in spite of sharply higher
market prices (Figure 2). Reduced production translated into reduced exports,
thus limiting supplies in international markets.
Why would production decline in the face of higher prices? The whole story may
be complex, but weather is clearly an important factor. In all four (4) exporters,
grain yields per acre in 2007 were below 2005 levels, primarily because of
drought and other weather–related factors. If better growing conditions result in a
return to normal yields in 2008, the increase in production could put downward
pressure on prices. The prospect of increased 2008 production in these major
wheat exporting countries may be one reason why July futures market prices for
wheat declined from over $12 per bushel in mid–March to less than $8 per
bushel just two months later.

It would be a mistake to blame poor crops for all of the increase in world grain
prices. While global wheat production in 2007 was less than in 2005, world corn
production increased by almost 12%, with increased production in the United
States accounting for most of the change. Considering five major grains (corn,
wheat, rice, barley and sorghum), total world grain production increased by an
estimated 81 million tons, or 4.1%, between 2005 and 2007 (Foreign Agricultural
Service 2008). That suggests world grain production actually increased in per–
capita terms, which is inconsistent with a story that production shortfalls are
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solely to blame for the run–up in world grain prices. The full story on the supply
side is, of course, far more complicated than suggested by these simple compari-
sons. While world grain production increased between 2005 and 2007, world
oilseed production declined slightly, in large part because of the shift in U.S.
acreage away from soybeans and into corn in 2007. World grain stocks have
been declining, as consumption has exceeded production in most recent years.
Stocks have now dropped to levels where it is harder to satisfy demand by con-
tinuing to draw down stocks. Grain production and exports from some countries
may increase in 2008, but market participants are also well aware that U.S. corn
acreage appears likely to decline significantly this year, limiting future supplies.

7) Demand Side Factors

In spite of sharply higher prices, global grain consumption has actually increased
by an estimated 83 million metric tons, or 4.3%, over the last two years (Figure
3). This only makes sense if there has been a significant shift in the demand for
grain, as population growth alone could only explain an increase of about half
that magnitude.

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The data represented in Figure 3 can serve as a type of Rorschach test.
Some look at the figure and note that demand has increased in a number of
countries and that U.S. ethanol use of grain accounts for less than 4% of global
grain consumption in 2007/08. These people tend to argue that strong economic
growth in India, China and elsewhere is causing diets to change in ways that
increase the demand for grain and other foods, and that growth in biofuel
demand is at most a small part of the story.

Other people prefer to focus on the changes in global grain consumption
over the last two years (Figure 4). India and China continue to be an important
part of the story, together accounting for about 28% of the increase in global
grain consumption. However, since India and China account for an even larger
share of the world’s population, that suggests per–capita grain consumption in
those two countries has not increased more than it has in the world as a whole.
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Instead, the spotlight shifts to the 35 million metric ton increase in U.S.
use of corn to make ethanol. This accounts for 43% of the increase in global
grain consumption between the 2005/06 and 2007/08 marketing years. Excluding
the use of U.S. corn to make ethanol, the increase in global grain consumption is
about 2.5%, just slightly more than the increase in the world’s population over the
same period. In other words, world per–capita use of grain for purposes other
than making ethanol is essentially unchanged from what it was two years ago.

In spite of sharply higher prices, oilseed meal and vegetable oil con-
sumption also have increased in a wide range of countries. China is an even
more important factor for oilseed meal and vegetable oil markets than it is in the
case of grains. Biofuels are again an important part of the story. Industrial uses
(including for biodiesel production) account for 36% of the increase in global
vegetable oil consumption between the 2005/06 and 2007/08 marketing years.

Would agree that food demand for grain is not very responsive to prices,
but it is remarkable that even a doubling of world prices appears to have caused
barely a ripple in the estimated consumption figures in most countries. Rising
incomes change food consumption patterns, often in ways that make consumer
purchases less responsive to the prices of basic farm commodities such as grain
and vegetable oil. Policies and other factors can limit how much of any given
change in world commodity prices is transmitted to food consumers. Still, it is
surprising that sharply higher world commodity prices have not made at least a
dent in consumption estimates.

8) Factors Affecting Both Supply and Demand
Three additional factors affecting both the supply and the demand for
food require at least a brief mention.
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a) The weaker dollar means that food prices expressed in foreign currency terms
have not increased as much as they have in dollar terms. This has supported
U.S. exports and contributed to the increase in dollar–denominated prices.
However, even after correcting for the weaker dollar, the prices of grains,
oilseeds, and other farm commodities have increased in almost all currencies.
Thus, the weaker dollar by itself cannot explain market developments.

b) Higher energy prices have contributed to higher farm commodity prices by
increasing costs of production and by increasing the demand for biofuels. High
petroleum and natural gas prices increase fuel and fertilizer costs. They also
raise the cost of transporting agricultural inputs to producers and outputs to
processors and consumers. High gasoline and diesel prices make biofuels more
competitive, encouraging expanded production.

c) Countries have responded to high prices in ways that have exacerbated the
situation. To restrain domestic price increases, some countries have restricted
exports and reduced import barriers. These and other measures have
suppressed domestic price increases, but at the expense of reducing supplies on
world markets and, thereby, further raising prices in international markets.

Factor of rice increase?

Reduce output by some growers due to poor weather conditions. Farmers
abandoning rice production for more profitable crops. In acreage devoted to rice due to
urbanization.

One additional obvious factor would be the rising cost of petroleum which
influences several aspects of rice production including transportation costs, the cost of
mechanized cultivation, and the cost of fertilizer. The price of oil has nearly doubled
since its January 2007 price of $50 per barrel. Major rice consuming countries including

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China, India, and Pakistan all subsidize oil consumption, i.e. the price at which gasoline
is sold is below the world price and the respective governments of these countries pick
up the tab. Egypt has only recently abandoned oil subsidies. Oil subsidies are a
commonplace in many rice consuming countries in Africa and the Middle East.

Ironically, these subsidies render the countries more vulnerable to increases in
the world price of petroleum since it encourages more petroleum-intensive means of
production than might otherwise be the case.

One possibility that might be considered is that government policy, both in net
rice consuming and net rice producing countries is influencing rice production and
prices. All of the major rice consuming countries have a labyrinth of price controls,
import duties or bans, export taxes or bans, and rice storage policies that have the
specific intent of influencing prices. While this is politically prudent it’s also inevitable
that these policies will have unforeseen secondary effects. Only around 7 per cent of
the world's rice supply is traded internationally, but it is a critical amount for any country
facing a shortage because rice is also a political commodity. Worldwide, economists are
worried that the diversion of agricultural land and certain crops to biofuel production is
cutting into grain and cereal production for human consumption.
Also, nowadays knowledge of world market prices reaches even the most remote
corners of the world: At the same time, prices set in international rice trading now have
an increasingly important effect on prices within countries. This has been particularly
true in an age of Internet and mobile phone communications when even farmers in
remote areas can learn about distant prices and decide whether their own buyers are
giving them a fair price.

Despite being the world’s biggest rice importer country, Philippines are not
spared from the price hike in rice too.
But this crisis is not all it seems. As what Agriculture Secretary Arthur Yap told BBC,
“There’s no shortage…the problem is not with supplies, but with price.”
“And when you consider that 80% of our population spends 60% of their income on food,
and 40% of that is on rice, it is very serious.”

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By hoarding rice, consumers are actually pushing the price of rice even higher
due to the increase in speculative demand. Furthermore, unscrupulous suppliers will
also make use of this crisis to profit even more.

Factor of wheat increase?

Many stores create a supply shortage by hording large quantities that they sell
for a high price. Greedy traders have driven the price of wheat and flour up by 30
percent in the last month, said President Ali Abdullah Saleh. To fight these price
increases, he has directed the government to import wheat instead of the traders.
During launching of Fourth General Conference of Agricultural Cooperative Federation,
Saleh said that “the government must import wheat to dominate the market. “We
liberalized trade, but will come back if they don’t respect trade liberalization. Then
government is to be the importer and the seller for the wheat and flour,” he said.

The government must import wheat and distribute it to the people in affordable
prices. It is true, he said, that there has been international price increases, but
unfortunately, the private sector increased the suffering of citizens, and this greed
unacceptable. The traders’ stores are full of those basic goods, said Saleh. “In the ‘80s,
we prevented the importing of fruit and vegetables. So many opposed this step, but we
planted it and now we export fruit and vegetables, so we must farm wheat, he said. He
called on all of the governorates to farm wheat. “The government will offer all support to
farmers of wheat and buy it from them with high prices—more than we paid to Australia,
Canada or America,” he said.

In addition, the increase in the cost of transporting food has risen, due to the
increase in oil prices. Global price increases have not exceeded 30 percent, but the
domestic price increases exceed 40 percent, said Mohammed Salah, a member of the
Director Board of Sana’a Chamber of Commerce.

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There is not a higher demand for foodstuffs, but there is a monopoly; this is what
is causing the increases, an economics expert, said that price increases would create
many economic problems, like local inflation exceeding the rate of global percent. Many
vendors raise prices of basic foodstuffs for their own profit. The government should
depend on the free market for importing foodstuffs, instead of depending on special
traders, the cabinet and senior importers of wheat and flour formed a joint committee to
tackle the problem of price increases of wheat and flour in the markets. The cabinet and
traders agreed to offer enough of these two basic food materials at reasonable prices
across the country.

Traders have confirmed that there are unused stored quantities of wheat and
flour. The importers said that the current storage of these materials would cover the
needs of the country for about four to five months. They denied any shortage of these
materials in all markets. The traders agreed to open stores to directly sell wheat and
flour to consumers, to ensure offering them without any unjustified increase. What effect
would the enhancing of the support price will have on the wheat produce this year is
difficult to assess at this point in time but the there is every reason to expect better
output, provided other important factors do not let down the farming community and the
country.

Availability of sufficient water is the most critical aspect of the next wheat crop
and unfortunately, prospects are negative on this score. The cost of inputs like fertilizers,
pesticides, herbicides, etc, has been constantly rising while their timely availability and
quality has not been fully reliable. The government is concerned about low produce and
has reportedly prepared a comprehensive plan for 'bridging the gap between the
potential and the present yield'. While this should have been done years back, it is a
question if the thinking is along correct lines now that the issue is being taken up.
The ministry of food, agriculture and livestock (MINFAL) is looking at productivity
through a comparison of produce from the farms of progressive farmers and remaining
members of the wheat growing community, that is, small farmers. The former produce
up to 50 pounds per acre while the latter's crop is mostly around half of that quantity for
the same land, if not lower.

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The reasons should be obvious to all and sundry, particularly the experts in
MINFAL. As the deal is not equal for the two, the results cannot be expected to be the
same from their fields. So the task before the administration of the agriculture sector is
bridging the facilities gap between them before hoping for comparable performance.

Farmers would be better off cultivating crops that require less water. That would
economically improve their lot and if they were not sowing wheat, the loss would not be
significant for the total national produce.

One of the most important aspects of wheat for obtaining optimum output is
timely sowing of the crop. Wheat is alternated with cotton and sugarcane. But harvesting
of both crops is almost invariably delayed. Cotton growers are hit by market
manipulations for forcing down prices of the crop while the cane scene remains at the
mercy of sugar mill owners.

Wheat suffered delayed cultivation during the last two years because of sugar
miller's insistence on late crushing to pressurize growers and exploit their dependence
on sugar mills. That contributed towards reducing yields in many fields. It wasn't an
irresolvable issue but segments in the government were supporting millers. As a result,
wheat sowing could not start on time in many cane fields.

Undertaking wheat cultivation on time is still possible but that can be done only if
the government adopts a stern policy towards sugar millers instead of acting as their
sales agent and protector. The administration would be solely responsible if wheat
cultivation is delayed in cane fields.

The loss may not amount to any substantial percentage of reduction in crop size
but considering everything, every grain should be important because what we fail to
produce would have to be imported- and that would have to be done at a higher cost, to
meet consumption requirements of the population that stand at around 21 million tons
per year.

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It is not clear if this figure includes smuggling out of Pakistan to adjoining
countries and even beyond them to some former Russian states. Smuggling needs must
be countered for ensuring that a minimum quantity is imported in case there is another
shortfall.

If that end were left loose, one would be forced to conclude that elements in the
administration patronize smugglers at the cost of national interests. Smuggling plus
delayed sowing because of late start of the crushing season are two factors the
government can and must control for securing maximum yield and utilizing wheat crop
for the people of Pakistan. Procurement arrangements in provinces also leave a lot to be
desired. Farmers would be better motivated to work harder by assurance of quick and
profitable disposal of their crop.

A serious and major overhauling of procurement machinery and change of
attitude in official agencies to accord preferential treatment to big landlords or influential
individuals with connections in the administration is also indicated for encouraging
farmers to produce more.

CHAPTER 4: EFFECTS OF INCREMENT OF RICE AND WHEAT PRICE

1. Impact of instability on commodity prices

While global geopolitical instability has ratcheted higher every year since the
terrorist attacks on the US in September 2001, global asset markets have hardly
responded. In 2006, many of the world’s stock markets, including America's, reached
record highs. As geopolitical instability increases further in 2007 the probability of major
disruptions in energy supplies will grow.

Instability in the Middle East and Africa is very likely to increase in 2007.
Intensification of Iraq’s civil war, conflict between Washington and Tehran, escalating
war between the Israelis and Palestinians, and growing domestic pressure on Lebanon’s
US-backed government will heighten instability in the Middle East. This instability will
help fuel growing unrest in Sudan, Chad, Congo and Somalia, provoking significant
military conflicts in Africa. Afghanistan’s insurgency is also expected to become more
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violent, prompting the gradual withdrawal of NATO forces.

Unprecedented global geopolitical instability will have its most obvious impact on
international commodity prices. More frequent energy supply disruptions in the Middle
East and Africa, combined with accelerating natural oil production declines in the world’s
largest oil fields, will keep crude oil and natural gas prices buoyant. Slower than
anticipated global economic growth will not push oil prices lower in 2007.

Production discipline - much greater than generally understood - among the
world’s major oil exporters will ensure oil supply growth remains below demand growth.
The continued rise of global energy prices in 2007, paired with growing demand for
renewable energy, will produce further strong increases in international grain prices. In
2006, corn and wheat prices in the US jumped by 70% and 60% respectively. Much of
this jump occurred between September and December.

Rapid growth of ethanol production capacity worldwide has contributed to this leap
in corn and wheat prices. Prices for soybeans and other oilseeds have also begun to
head higher on the back of rapidly growing global demand for biodiesel fuel. The
substantial increase in petroleum-related energy prices since 2001 is only one factor
behind growing demand for biofuels. Increasingly stringent environmental regulations,
energy security concerns and targeted levels for alternative energy use in many
countries is also driving demand for biofuels

2. Inflation and recession

The growing use of corn, wheat, soybeans and other grains to produce biofuels is
expected to nearly double prices for these commodities in 2007. In addition to grain-
related foods, prices for other food staples that are grain-dependent, including meat and
milk products, will also head higher in 2007. The result will be much higher than
expected US inflation. Consumer price inflation (CPI) in the US is already significantly
higher than CPI in Germany, Switzerland, the UK and Japan. In 2007, US inflation will
accelerate, widening the inflation gap between it and other countries.

By every measure, inflation in the US has clearly accelerated since 2004. In 2005,
the Federal Reserve’s preferred measure of inflation, the personal consumption
expenditure (PCE) deflator exceeded 2% for the first time since 1995. The core PCE has
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continued to accelerate in 2006, and will likely top 2.5% by the end of the year. This is
significant because the Fed’s stated aim is to keep core PCE between 1.5% and 2%.
The steady acceleration of core PCE shows that inflation from rising energy prices has
penetrated the broader US economy.

Despite the obvious acceleration of inflation, the Federal Reserve shifted monetary
policy into neutral in late summer. The Fed has justified more accommodative monetary
policy in the face of rising inflation by suggesting that slowing US economic growth will
eventually mitigate inflation. This is a huge gamble because US inflation is being pushed
higher by supply-driven energy price shocks rather than demand. In 2007, continued
energy supply shocks are likely to feed a grain supply shock, stoking a sharp increase in
food price inflation and further acceleration of core PCE.

The stated logic behind the Fed’s monetary policy change is spurious, to say the
least. A 12-year-old child could grasp the idea that energy supply problems are pushing
US inflation higher and that these supply problems are likely to intensify in 2007. This
suggests that another explanation must be behind the Fed’s shift to more
accommodative monetary policy. The most likely seems to be growing concern among
Fed policymakers over increasing systemic problems for the US financial system arising
from the collapse of the US housing market.

Between 2001 and 2005, very low interest rates in the US, combined with the
proliferation of non-traditional mortgage products and easy credit access, allowed many
American households to convert substantial home price gains into income gains through
cash-out mortgage refinancing. Cash-out mortgage refinancing accounted for about 50%
of all mortgage refinancing between 2001 and 2004. In 2005, cash-out mortgage
refinancing accounted for 73% of all mortgage refinancing. In the first half of 2006, cash-
out refinancing accounted for a staggering 87% of all refinancing.

Home price appreciation in the US slowed sharply in the first half of 2006. In the
third quarter of 2006, home prices began to fall steeply. According to data from the US
Census Bureau, new home prices dropped nearly 10% in September 2006 from the
same period in 2005. This marks the sharpest fall in US home prices in 35 years. Rising
inventories of unsold homes have been pushing home prices lower.

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Recently, America’s largest home builders and home sellers have begun trying to
convince investors and home buyers that the housing market has stabilized. Falling
long-term interest rates have reduced mortgage rates, encouraging a very small number
of buyers to return to the market. However, the housing sector’s weak pulse is very likely
to vanish again in early 2007 as confusion over Federal Reserve policy mounts, the
pace of inflation quickens and financial markets in the US swoon.

America’s economic fairytale has turned into a nightmare and very few investors
realize it. In addition to producing a sudden and sharp decline in household income by
eliminating the prospect of new mortgage refinancing for many Americans, declining
prices for new and existing homes will have a strong negative impact on the US financial
system, severely restraining credit growth. Falling home prices, especially in what were
once the hottest housing and mortgage markets in the US, have caused mortgage
default rates and foreclosures to surge higher.

The combination of rising defaults, foreclosures and falling collateral values is
beginning to weaken the balance sheets of mortgage lenders, including several of
America’s largest banks. Growing weakness in the banking sector is very alarming.
Banking sector and economic crises in many countries over the past 25 years can be
traced to overly enthusiastic credit growth used to finance either capital investment or
real estate speculation, or both. Japan offers a stunning example of what can happen
after a real estate bubble bursts.

The Federal Reserve appears determined to let financial markets’ self-correct in
order to adjust interest rates to changing expectations for economic growth and inflation.
Self-correction is a defining feature of financial markets. However, with the Fed
rudderless, it is very unlikely that this self-correction will occur in an orderly and gradual
manner. Rather, such self-correction will be sudden and sharp.

3. Dollar devaluation

Growing concern at the Federal Reserve over the impact of rapidly rising mortgage
defaults and foreclosures on the US banking system will prevent it from tightening
monetary policy in 2007. Inflation in the US is already substantially higher than inflation
in Europe and Japan. Rising energy prices joined by rising food prices will have a

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greater impact on inflation in the US than in Europe and Japan because dollar
depreciation is expected to partially offset rising dollar-based commodity prices in 2007.

In addition, inflation will rise from a much lower base in Europe and Japan than in
the US. As a result, US inflation will be much higher than inflation in most other countries
in 2007. More importantly, real yields on US Treasury securities, which are only
marginally positive now, are expected to become negative in 2007 as US inflation climbs
higher and the Fed begins to cut interest rates.

At the same time, real yields on European and Japanese government bonds,
which are already higher than real yields in the US, are expected to move higher. The
growing real yield gap between the US and other countries will place enormous
downward pressure on the dollar. Waning Fed credibility and increasing political
pressure in the US for dollar depreciation will speed the dollar’s decline.

Democrats will take control of the US Congress in January 2007. Democrats
have a strong history of economic intervention and are very likely to use trade and
exchange rate policy changes in an attempt to reinvigorate rapidly slowing US economic
growth. Asia’s economic giants, Japan and China, are likely to take the brunt of any
economic policy changes engineered in the US Congress.

Legislation in the US aimed at prying open export markets in Japan and China is likely to
inflame already substantial trade tensions, especially between Washington and Beijing.
Meanwhile, the implicit change in US exchange rate policy that will precede such
legislation will increase downward pressure on the value of the dollar against all major
currencies, particularly the yen.

The dollar is likely to depreciate by at least 20% against the yen, the Swiss franc, the
euro and the pound in 2007. The dollar will also depreciate against the currencies of
emerging market commodity exporters. Finally, Beijing will probably allow the yuan to
appreciate about 10% against the dollar. Rather than political pressure from
Washington, continued high energy prices and soaring grain prices will motivate the
revaluation of the Yuan.

4. Sliding stock markets
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Economic growth in China is likely to slip towards 6% in 2007. Beijing’s enormous
fiscal latitude will ensure that ramped up fiscal spending will partially offset significant
weakness in China’s US-oriented export sector. Accelerated yuan revaluation against
the dollar will help offset the inflationary impact of rising energy and grain prices.

Economic growth in Japan will probably fall below 1.5% in 2007 due to export
sector weakness. In addition to importing all of its energy needs, Japan relies on
imports of US corn for sustaining domestic meat production. This reliance on energy
and grain imports will encourage the Bank of Japan to push the yen higher against the
dollar to contain inflation.

Economic growth in Korea should slow towards 1% in 2007. Growing tensions
between Washington and Pyongyang will undermine private consumption and
investment while much weaker US- and China-bound exports will slow export sector
growth. Like Japan, Korea is also a major importer of US corn. Won appreciation against
the dollar will be limited by growing security concerns. As a result, inflation will
accelerate, further undermining the won.

Economic growth in South and Southeast Asia will also slow sharply. In addition
to slowing US economic growth, increasing global geopolitical instability will lead to more
frequent and violent terrorist attacks, especially in India, Indonesia, the Philippines and
Thailand. These attacks will produce further political and social instability. Foreign capital
flight, driven by much slower than expected economic growth and a sharp correction in
US equities, will make these countries Asia’s worst investment performers in 2007.

Economic growth in Latin America will also suffer from the US downturn in 2007.
Mexico, where political and social instability are expected to increase substantially while
US-bound exports grind to a halt, should follow the US into recession. Capital flight will
weaken the peso, preventing exchange rate appreciation from offsetting the impact of
sharply higher corn prices on the domestic food industry.

Economic growth in Brazil, Colombia and Peru will also slow sharply in 2007.
Brazil’s export sector will benefit from soaring grain prices, while Colombia and Peru will
suffer from the same. Equities in all four countries will follow US equities downward.
Economic growth in Venezuela, Ecuador and Argentina will benefit from soaring

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commodity prices. This will not prevent equity market correction, but should underpin
exchange rates in all three countries.

With the notable exception of Turkey, economic growth in Europe should suffer
the least from slowing US economic growth in 2007. Monetary policy in the EU will
tighten further, underpinning currency appreciation. Economic interdependence between
EU members will insulate the region somewhat from slowing economic growth in the rest
of the world. Russia will benefit from rising commodity prices. Despite more promising
economic prospects, equities across Europe will follow US equities in a sharp correction.

Bond markets around the world are likely to be very volatile in 2007. Rapidly
changing economic growth and inflation expectations will produce wide price swings.
This volatility will be led by US bonds, which will see falling yields in early 2007 be
replaced by rising yields in mid-2007 as inflation increases and foreign capital flight
accelerates. Spreads on emerging market bonds will widen with falling equity markets
around the world. Commodities, including energy, grains and precious metals, will
probably perform much better than traditional investment assets as both investors and
central banks speed diversification.

Jephraim P Gundzik is president of Condor Advisers. Condor Advisers provides
investment risk analysis to individuals and institutions worldwide.

5. The impact of the rise in food prices on the standard of living of consumers
should be further limited by the gradually declining share of total household income
spent on food. This share currently stands on average at 14% in the EU and, indeed, is
much lower for many countries of northern Europe.

Therefore, in the case where higher commodity prices were fully transmitted to
consumers, the overall increase in consumer food expenditure of 5% would lead to a
more moderate decrease of around 0.7% in the purchasing power of an average EU-27
household.

However, it should be taken into account that the degree of recent price
developments and transmissions along the supply chain varies across Member States,
so that the impact considerations given above for theoretical EU-27 average consumer

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prices and households do not hold true for the diversity of implications actually felt in
single Member States.

Furthermore, the share of food expenditure in total household expenditure varies
considerably among Member States (reflecting differing income/welfare levels). Within
Member States, the respective share varies between different household types
(household types differentiated by household income, household composition and
household location).

As a result, higher food prices would affect consumers differently across the EU,
according to the income level and consumption patterns: in general, low income
households spend a higher share of their disposable income on food and they have less
flexibility to adjust expenditure to other budget items. Moreover, regional differences in
dietary patterns mean that countries where food consumption is a more important share
of household budget and where less processed food is consumed would be more
affected than others (e.g. more processed foods in Luxembourg and less processed
foods in Romania).

Recommendation for rice

For ordinary households, consumers hoard rice for two reasons.

• To ensure there is no shortage of rice in the household.
• To avoid impending price hikes in rice.
• In short, consumers hoard rice for the perceived sense of food security. And yes,
there will be so-called “food security” for these people in the short run. However,
how will these people be affected in the long run? A demand & supply analysis is
used to illustrate the long-run effects.

Demand-side argument

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Out of fear for impending price rises in the future, consumers make a decision to buy
more rice than they need. As a result, the rice market oversees a rise in speculative
demand for rice from the consumers. This means that quantity of rice demanded is not
equal to quantity of rice actually consumed.

Due to the increase in speculative demand, total quantity demanded for rice
increases. As a result, to maximize profits producers will increase price for rice sold.
Hence, price of rice increases because of an increase in speculative demand from the
consumers.

Supply-side argument

To cope with the increase in quantity demanded for rice, producers will have to
increase quantity of rice sold. There are two ways it can do this:

• Draw from existing rice stockpiles/reserves and sell the surplus.
• Increase rice production.

Regardless of which measure producers choose to adopt, they will still increase the
price of rice. Why?

Most varieties of rice require an average time of 3-6 months to grow before it can be
harvested. The increase in opportunity cost for growing more rice (i.e. the time could
have been used to grow other food crops, the additional labor used for harvesting more
rice etc.) will justify the producers in increasing the price of rice further when it sells the
new harvest.

If producers were to draw from existing rice stockpiles, technically they do not need
to produce more rice, but then the cost of hiring labor to deliver rice from the storage
warehouses to the market will still give producers an incentive to increase price to
minimize their operating costs

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As a result, no matter how much rice is supplied, there will always be “rice shortage”
because the poor can’t afford to buy rice. As long as price remains at the current inflated
level, the lives of the poor won’t get better.

Thus, this means that since consumers can’t change the way rice is priced, they can
do the next best alternative; to try and increase their income instead. This will mean
upgrading their existing working skills so as to supplement their current income.

Recommendation for Wheat

The government has fixed the support price of wheat at Rs950 per 40 kilograms
for next year’s crop, as compared to Rs625 for the same quantity this year. The support
price lays down a guarantee of the rate at which the government would purchase wheat
from a farmer if he is unable to gain a higher rate in the market. The prime minister has
stated the purpose was to encourage wheat cultivation so that the production target of
25 million tones could be met and food security for the country achieved. He has also
explained that the move, by bringing the rate for wheat in Pakistan at par with
neighboring countries, would help curb smuggling. The widespread smuggling and
hoarding of wheat over the past year has been a factor in the acute shortages we have
faced recently.

Predictably, farmers, who will now receive Rs325 more per 40 kg, seem pleased
by the new price. Consumers of course will be less enthusiastic. The new support price
will mean an increase in the cost of ‘atta’. Indeed, the increase in rates, after Ramadan,
has begun already to be seen, although, of course, the new support price will be
effective only after the new crop is harvested. This rise has been most notable in Punjab,
where tough measures had been put in place to control rates. ‘Roti’ prices have risen
steeply from two rupees to six rupees, according to some reports. The provincial
government will now need to demonstrate it can stick to its promise of maintaining the
lower price even after Ramadan.

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While the increased support prices injects additional funds of Rs60 billion into the
rural economy, offering it a much-needed boost, the government must keep in mind the
need to balance such benefits against the suffering of consumers. Rapid rises in food
price inflation have already brought people to near breaking point. In such a situation the
government must carefully weigh the consequence of each decision with extra care,
gazing into the crystal ball of the future even while considering the steps vital for today.

Another aspect should be taken in to consideration while working out output from
different fields and that is yield from rain fed areas. Their highest produce is usually no
more than 15 mound per acre and is often even below that low figure.

Farmers of these areas obtain a minimum of produce and income from their land
and their contribution to the overall size of the wheat crop is consequently limited. A
change of strategy in cropping in rain-fed lands is required.

A raise in the support price for wheat is a positive step but it is not an end in itself.
It is a step towards higher production of wheat but unlikely to provide the best results if
other vital factors of wheat crop are ignored.

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Conclusion

Thus, the two (2) arguments prove that hoarding rice will only result in price hikes
in the future. Thus, hoarding of rice should be discouraged as it only discourages social
equity and harms the society in the long run.

The consumers who hoarded rice in the past won’t be spared from the price hike
too. Given the fact that brown rice can only be stored for 6 months in average conditions,
and the common occurrences of natural pests such as rice weevils, consumers should
not expect their own stockpile of rice to last long.

Here are some pointers to what you can do instead, to prepare yourself for the
impending price hike:

• Gradually reduce and ration your rice intake.
• Start eating alternatives in greater portions during meals, such as
potatoes or cereals.

Many people have the misconception that the current price hike is due to a
dominant fall in supply of rice. However, few realized that the current price hike of rice
also highlights the vast income inequality in the population that many nations faced.

According to statistics from The Thailand Rice Exporters Association, production
of rice has been increasing all this while. For instance, milled production in 2004-2005

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was 400,475,000 MT, while production in 2006-2007 was 418,235,000 MT. This proves
that there were no hitches in rice supply.

The main reason why there is a so-called shortage of rice is because rate of
increase in demand is exceeding rate of increase in supply at an alarming rate (note :
not quantity, but rate of increase in quantity), and thus this has led to market speculation
which results in price hikes all over the world.
As a result, no matter how much rice is supplied, there will always be “rice
shortage” because the poor can’t afford to buy rice. As long as price remains at the
current inflated level, the lives of the poor won’t get better.

Thus, this means that since consumers can’t change the way rice is priced, they
can do the next best alternative; to try and increase their income instead. This will mean
upgrading their existing working skills so as to supplement their current income.

Until the situation improves, otherwise it does not seem that the man on the
street can do anything much, but to grit through their teeth and continue to plough on in
life.

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