Made in China: Your Rice Bowl

Another interesting story from Forbes.

A Black Market Grows In Rice
Shu-Ching Jean Chen, 05.01.08, 2:26 AM ET

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HONG KONG -

With grain prices surging and major producers restricting exports, a lucrative illicit trade in rice and flour has emerged in Asia.

The biggest opportunities may be in China, the world's largest rice producer, where grain prices are among the lowest in the world due to a combination of domestic subsidies and export curbs.

Reports of rice smuggling have surfaced this week in areas all along China's sprawling borders, from Yunan province next to Vietnam, to northwest Xinjiang, which borders the central Asian states of Kazakhstan and Kyrgyzstan, all the way to Guangdong, a prosperous southern Chinese province that sources 60% of its rice from elsewhere in the country. Smuggled Chinese rice has turned up in Hong Kong and Macau, where prices are in line with international rates and there has been panic buying. So far, Chinese customs officials have described the incidents as isolated, but increasingly the authorities are worried about the potential for an expansion of smuggling should price gaps widen further.

Smuggling is occurring across Asia due to price disparities between major grain-producing countries, where domestic prices are being kept artificially low, and the region's major importers.

Indonesia, a major rice producer that curtailed exports last month, is stepping up border patrols to prevent smuggling to the neighboring Philippines, the world's largest rice importer.

Pakistan has been trying to stem smuggling of rice and wheat into India and Afghanistan. Last month, an Afghan border policeman was reportedly killed in an exchange of fire with Pakistani troops who were trying to stop a caravan of flour smugglers.

In the case of China, the root cause of smuggling is obvious: Prevailing international rice prices are as much as four times higher than in China; the price of wheat, more than twice as high.

China accounts for nearly a third of total world rice output.

There's no reason for China to worry that the smuggling will take food out of the mouths of its citizens. Four consecutive years of ample grain harvests have not only allowed China to meet its self-sufficiency goal of satisfying more than 90% of domestic demand, but also to build up massive reserves.

Attempting to reassure the public of the government's ability to feed the country amid the tightest global grain markets in three decades, Premier Wen Jiabao said in March that China had accumulated between 150 million and 200 million tons of grain reserves, enough to supply more than 30% of its annual consumption, compared with the 17% to 18% mark deemed safe by the U.N. Food and Agriculture Organization. That explains why, despite blistering headline inflation due to the skyrocketing prices of oil and pork, Chinese rice prices remain stable.

With all the incentives to continue subsidizing rural rice farmers, China may choose to live with the price disparity for some time. Better to build a Great Wall against rice imports than risk irritating millions of its poorest citizens.