Global rice demand: Is rice really becoming an inferior good? Mary Joanne Matriz,1 Imelda Molina,1 Harold Glenn Valera,1 Samarendu Mohanty,1 and Nelissa Jamora2 1 2 Social Sciences Division, International Rice Research Institute, Los Banos, Philippines; Agriculture, Food, and Resource Economics, Michigan State University, East Lansing, MI, USA.
Previous studies by the Food and Agriculture Organization (FAO 1971), Wong (1976), Mears (1981), and Ito et al (1989) implied that income elasticities for rice in Asian countries are becoming smaller over time and concluded that per capita rice consumption in Asia has a positive relationship with income up to a certain level, but, beyond that level, an inverse relationship exists. According to most of these studies, including Ingco (1991) and Huang and Bouis (1996), as per capita income rises, demand for rice and other major staples declines.
However, depending on the data and methodology that they have used, the authors generated contrasting estimates of income and own price elasticities for rice and, therefore, the normality or inferiority of rice as a good also varied. Barker et al (1985) cited that tastes and preferences, income, and the price of rice relative to the price of other substitutes determine the level of rice consumption of any group at any time.
It is therefore crucial to include the latest data in the analysis of demand parameters, particularly income and price elasticities given that consumption patterns evolve over time. Such demand parameters will provide a long-run perspective on the behavior of global rice demand and its subsequent impact on food security. This paper aims to reexamine the trend in global consumption as well as analyze the effect of income changes on global rice consumption using the IRRI Global Rice Model (IGRM).
The IGRM is a partial equilibrium structural econometric simulation model that includes 21 major rice-producing, -consuming, and -trading countries: the Philippines, Thailand, Pakistan, Japan, Vietnam, Myanmar, Cambodia, Bangladesh, China, India, Indonesia, South Korea, South Africa, Cote d’Ivoire, Nigeria, Egypt, Mozambique, Sudan, Kenya, Brazil, and the United States. The IGRM The IGRM, a representative country model, includes supply, demand, trade, ending stocks, and market equilibrium conditions. Rice production is modeled by estimating separate area and yield equations.
The model incorporates the regional supply response of rice and different competing crops in some producing regions. On the demand side, rice consumption includes food, seed, and other uses. Individual country models are then linked through net trade equations to solve Thai FOB (5% broken, Bangkok) to appropriately link an individual country to the world rice economy. Since the rice market is heavily distorted, farm price was solved domestically for most of the countries. The model explicitly includes policy variables in supply, demand, ending stocks, exports, imports, and price transmission equations.
The data were sourced from 1 Presented at the 28th International Rice Research Conference, 8-12 November 2010, Hanoi, Vietnam OP13: Policy, Market, and Supply Chain country statistical yearbooks, the Food and Agricultural Policy Research Institute (FAPRI 2010), the Production, Supply, and Distribution (PSD) database, and Attache Reports of the U. S. Department of Agriculture (USDA 2010). Demand elasticities The relationship between changes in rice consumption due to income and price is measured by income and price elasticity of demand, respectively.
These demand elasticities are estimated only for rice and do not take into account systematic linkages to the demand for other food such as meat, fish, and other cereals. Estimated income elasticity of demand is indeed becoming smaller over time. The IGRM estimates specifically show that rice is already considered an inferior good in higher income countries such as Japan and South Korea, in major rice-exporting countries such as Thailand and Vietnam, and in emerging economies such as China and India. In Indonesia, rice is also considered an inferior good.
For most of the lower income Asian countries (Bangladesh, Cambodia, Pakistan, Myanmar, and the Philippines), as well as in African countries (Cote d’Ivoire, Kenya, Egypt, Nigeria, South Africa, and Sudan), and in Brazil and the United States, rice is still a normal commodity or a necessity. IGRM price elasticity estimates show that in all countries rice demand is inelastic. Ten-year baseline projection of global demand The model is used to develop a ten-year baseline projection of global demand and prices with a set of assumptions about the economy, agricultural policies, and technology changes in net-exporting and net-importing countries.
The modeled countries are grouped according to the level of per capita consumption: (1) those consuming less than 50 kg/year (Brazil, Kenya, Mozambique, Nigeria, Pakistan, South Africa, Sudan, and the U. S. ); (2) those consuming 50 to 99 kg/year (China, Cote d’Ivoire, Egypt, India, Japan, and South Korea); (3) those consuming 100 to 200 kg/year (Bangladesh, Indonesia, the Philippines, and Thailand); and (4) those consuming more than 200 kg/year (Cambodia, Myanmar, and Vietnam).
Scenarios using a 2% increase and decrease in per capita GDP are simulated and compared with the baseline to quantify the effect of changes in income on global rice consumption and prices. The IGRM estimated global rice demand to rise from 443 million tons in 2011 to 477 million tons in 2021. There is an overall increase of 8% in the next 10 years. However, on a per capita basis, world consumption is expected to decline by 3% from 64 kg/year in 2011 to 62 kg/year by 2021. Simulation results World rice consumption has a negative response to changes in income.
With a 2% increase in per capita GDP, world rice consumption will decline from –0. 01% in 2011 to –0. 06% in 2021. An almost the same rate of increase, however, is expected when per capita GDP decreases by 2%. The same is true in terms of per capita world consumption. This is because countries that consider rice an inferior good comprise 67% of the total world consumption. Those countries consuming 50 to 99 kg/capita/year and those consuming more than 200 kg/capita/year are expected to reduce their rice intake with increases in income since they represent countries where rice is considered an inferior good.
Those consuming less than 50 kg/capita/year and from 100 to 200 2 Presented at the 28th International Rice Research Conference, 8-12 November 2010, Hanoi, Vietnam OP13: Policy, Market, and Supply Chain kg/capita/year are expected to behave otherwise. In addition, countries with the lowest (less than 50 kg/capita/year) and the highest (more than 200 kg/capita/year) rice consumption are more sensitive to income changes than those consuming from 50 to 200 kg/capita/year. On a per capita basis, countries behave according to their income elasticity of demand.
For instance, India, where rice is already considered an inferior good, will decrease (increase) its per capita consumption by as much as 0. 73% (0. 61%) in 2021 when income increases (decreases) by 2%. The opposite behavior is expected for the Philippines, where rice is still a normal good. In terms of prices, individual countries also behave according to their income elasticity of demand. India’s retail price will decrease as income increases, while the Philippines’ retail price rises with an income increase. Concluding remarks
Rice is already considered an inferior good in higher income Asian countries, in major rice exporters, and in emerging economies, which constitute about 67% of the total world consumption. For most of the lower income Asian countries, African countries, as well as Brazil and the United States, rice is still a normal commodity. This result may suggest a relatively decreasing per capita demand for rice in the future. Although world per capita consumption is projected to decrease by 3% from 2011 to 2021, global rice demand is still expected to rise by 8% for the same year.
Therefore, it is recommended to adopt technologies that will help increase rice yields in order to meet the projected increase in demand. This may include farmers’ greater application of improved crop, soil, and water management innovations, and better targeted approaches to crop improvement that are more explicitly focused on adapting to climate change. In addition, world rice consumption has a negative response to changes in income. However, regardless of the type of income shock, world rice consumption will change minimally (less than 1%).
Countries consuming the least (less than 50 kg/capita/year) and the most (more than 200 kg/capita/year) are more sensitive to income changes than those consuming from 50 to 200 kg/capita/year. Moreover, individual countries’ response to income shock is also based on their income elasticity of demand as measured in terms of consumption and price changes. References Barker R, Herdt R, Rose B. 1985. The rice economy of Asia. Washington, D. C. (USA): Resources for the Future. Food and Agriculture Organization (FAO). 1971. Agricultural commodity projections, 1970? 980, vol. 1,2. Rome. FAPRI (Food and Agricultural Policy Research Institute). 2010. World and Agricultural Outlook Database. www. fapri. iastate. edu. Huang J, Bouis H. 1996. Structural changes in the demand for food in Asia. Food, Agriculture, and the Environment Discussion Paper 11. Washington, D. C. (USA): International Food Policy Research Institute. Ingco M. 1991. Is rice becoming an inferior good? Food demand in the Philippines. Policy Research and External Affairs Working Paper. Washington, D. C. (USA): World Bank. 3
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