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US Agrees to let Japan Flood Rice Market with Stored Rice

Prices quickly fell on Tokyo's call to tap into its huge reserves. But how did the stash get so big, and why does rice-rich Japan import the staple?

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With prices now falling, the global rice crisis seems to be subsiding. That's thanks in part to a policy announcement by a Japanese bureaucrat. On May 19, Japan's Deputy Agriculture Minister, Toshiro Shirasu, said that Tokyo would release some of its massive stockpile of rice to the Philippines, selling 50,000 tons "as soon as possible" and releasing another 200,000 tons as food aid. The first shipment could reach the Philippines by late summer. Shirasu also left open the possibility of using more of its reserves to help other countries in need.

To understand Japan's role in deflating the rice market, it helps to visit the warehouses rimming Tokyo Bay. It's here in temperature-controlled buildings that Japan keeps millions of 30-kilogram vinyl bags of rice that it imports every year. Tokyo doesn't need rice from the outside world: The country's heavily subsidized farmers produce more than enough to feed the country's 127 million people. Yet every year since 1995, Tokyo has bought hundreds of thousands of metric tons of rice from the U.S., Thailand, Vietnam, China, and Australia.

A Rice Imbalance

Why does Japan buy rice it doesn't need or want? In order to follow World Trade Organization rules, which date to 1995 and are aimed at opening the country's rice market. The U.S. fought for years to end Japanese rice protectionism, and getting Tokyo to agree to import rice from the U.S. and elsewhere was long a goal of American trade policy. But while the Japanese have been buying rice from farms in China and California for more than a decade, almost no imports ever end up on dinner plates in Japan. Instead the imported rice is sent as food aid to North Korea, added to beer and rice cakes, or mixed with other grains to feed pigs and chickens. Or it just sits in storage for years. As of last October, Japan's warehouses were bulging with 2.6 million tons of surplus rice, including 1.5 million tons of imported rice, 900,000 tons of it American medium-grain rice.

It's one of the cruel ironies of global trade that poor countries have been paying through the nose for rice while Japan has been sitting on reserves (BusinessWeek, 5/1/08). The imbalance is a cause for concern because half the world's population depends on rice as a staple food. Following Shirasu's announcement that Japan is putting its reserves to good use, U.S. trade officials have sent word to Tokyo that they back the move. The two sides will meet in Washington on May 23 to discuss the details.

That's good news for poor nations like Bangladesh and the Philippines that either import rice or get handouts. The Japanese gesture has helped to rein in rice prices. On the Chicago Board of Trade (CBOT), rice futures have fallen almost 20% since reaching an all-time high of $25.07 per 100 lb. on April 24. But they are still nearly three times their levels from a year ago.

WTO Rules Act as a Safety Valve

What started the panicky buying? Worries about a scarcity of rice after major exporters banned or drastically cut back their overseas shipments (BusinessWeek.com, 4/28/08). Since last fall, countries such as India and Vietnam—among the world's top rice-exporting nations—have curbed shipments to keep a lid on domestic inflation caused by soaring food prices. That forced many countries to dip into their own inventories. The U.S. Agriculture Dept. estimates that such stockpiles are now at their lowest levels since the early 1980s. The recent cyclone that devastated Myanmar's rice crop, hoarding by consumers, and speculative buying at the CBOT added to the panic. In Haiti and parts of Africa, food riots erupted.

This time, the WTO rules—formally known as Minimum Market Access—acted as a safety valve for the market. Japan's 1.5 million tons of imported rice reserves amount to roughly 5% of the 28 million tons that are traded globally ever year, which explains why Tokyo's announcement had a sizable and immediate impact.

Signs that India and Vietnam plan to relax curbs on rice exports also helped assuage concerns about a shortage.
A Report Makes the Rounds

But with oil prices edging toward $140 a barrel, rice prices might not stay put for long. Some experts think the U.S. and Japan should consider changing the WTO rules. "As a short-term solution the WTO program was a way to open a closed market," says Nobuyuki Chino, president of Tokyo-based Unipac Grain, which is owned by Minnesota-based CHS Inc. "But now it should be reviewed because it's an obstacle for free trade."

To tap its import reserves, Tokyo had to get Washington's imprimatur. That might not have happened if not for Tom Slayton, a former U.S. agriculture official, and Peter Timmer, a visiting Stanford University professor, who drew attention to Japan's reserves in a report on the Center for Global Development's (CGD) Web site in early May. Releasing the rice, they wrote, "would bring prices down immediately, averting hunger, malnutrition and increased mortality among poor people in Asia."

Even so, giving Japan the green light wasn't an easy decision for Washington. High rice prices had brought American farmers an unexpected windfall. What's more, the U.S. had a more pressing matter to attend to, the $300 billion farm bill working its way through Congress. But the CGD paper circulated in Washington. Two Congressional committees and a Washington Post editorial referred to the paper, and U.S. trade officials were soon reaching out to the Japanese.
Only a Short-Term Fix

Temporarily using Japan's stockpile as food aid is a stopgap measure, not a solution, says Slayton. That's because food aid has its limits. The World Food Program shipped an average of 461,000 tons of rice annually as aid from 2002 to 2006. That would feed just 2.5 million people in Cambodia or Bangladesh, a fraction of the estimated 1.6 billion people who live on less than $1 a day, Slayton says.

However, neither Washington nor Tokyo seems prepared to change its tack. The U.S. first lodged a trade complaint against Japan over rice in 1980, and since the 1990s Washington has insisted on forcing American rice on the Japanese. U.S. trade officials say the policy helps Corporate Japan. Even at current price levels, they say, imported rice costs Japanese companies half the price of domestically grown rice. Tokyo says Japanese consumers have no appetite for cheap foreign rice, though it may simply fear undermining its own farm policy. "One of the problems in the global rice market is that it's inefficient and opaque," says Nick Cashmore, CLSA's head of commodities research in Asia. "And it's also controlled and influenced by state-owned enterprises which do the buying and selling rather than letting the private sector do the job."
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