Rice, the everyday food, livelihood and paddy from which it isprocessed and produced is integral to our homes and the country. The farmer, laborer, transporter, miller, exporter and banker comprise a multi-million strong focus group who are directly engaged in the activity, making the industry a country’s largest employer. Our primary sector which produces a huge of 80 million metric tons of paddy every year gives rise to a multi-billion dollar industry, having a large chunk of the country’s small export portfolio. Needless to say our agriculture driven economy thrives on the extent of the commodity’s production and the well-being of its supply chain.

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Demand And Supply Of Rice

Now moving beyond the well-known rhetoric, let us look at what has been the recent state of the nation’s premier industry. From price crash to falling exports, chaos and unpopular sentiment has been the name of the game. The once well-endowed industry, and now it is simply going through very rough times. Price crash is deemed to be the culprit, some attributing the reason behind this to an excessive crop and most to a decline in basmati rice exports to Iran. However, the reality behind this is much different and deeper.

Well, to understand the price fluctuations we need to first understand its demand and supply. The commodity’s demand can be segregated into two categories, we would call the first one “systemic demand”, which can be defined as the product’s natural demand and such demand is static in nature with a steadily growing curve in correlation with population growth. Now let’s look at the second form of demand which we would call it as “bufferdemand”. This form of demand can be defined as ‘extra’ stock that is built up at every level in the supply chain, the nature of such demand can be characterized as being very volatile, fluctuation wildly with future expectation of price movement and cash flow availability. The supply side on the other hand can also be segregated into two categories, one generating from paddy crops, the systemic supply,and this form of supply has an upward curve for the well irrigated basmati paddy crop almost matching the systemic demand for it. Now where the game is played it is in the second form of supply, the buffer supply,as the name suggests this supply is generated from the liquidation of the ‘excess stock’ that is built up in the system.

The Rise And Fall In Prices Of Rice

The Price Crash In RiceNow that we have a basic understanding of the commodities demand and supply, we can look at how these forces behaved during the past 5 years. The advent of the new decade witnessed a massive increase in the buffer demand of rice and paddy fuelled by increasing prices and cash availability with every link in the chain building up their inventories. On the contrary systemic demand remained constant, spiking during the 2012-13 period due to the Iran-U.S. war hysteria. Analyzing the supply side we find that the systemic supply of basmati paddy saw an increasing trend by the virtue of farmers in the northern parts of the country turning towards cultivation of 1121 paddy. The buffer supply saw a sharp decline as the expectation of capital gains from increased stock prices discouraged people from selling their inventories.

Further, in the end the systemic demand met with the systemic supply but a rise in buffer demand and a fall in buffer supply led to what can be called a double effect causing a massive upward swing in the prices. This continued for some time until 2014 when the economy took a U-turn and record breaking NPA levels caused the banks to restrict funding to the sector, gradually leading to drain of cash out of the system. This led to a decline in buffer demand as less and thus less money was available to purchase fresh stocks, leading to a fall in prices. This was coupled with an increase in buffer supply as by now everyone wanted to sell their extra stocks this time around creating a double downward effect. The prices ultimately crashed.

The Impact

From what we have read so far, one must blame the speculative instinct of the industry to be devil here but before we move forward we should look at the state of the industry during the ‘good’ (pre 2014) years. The industry saw increased revenues for farmers, increased exports from the country as well as an increase in employment. Now, when we look at more recent dates we see only disrespect everywhere. If we take a moment to think about it, the building up of ‘excess’ inventory trickled down benefits to the lowest levels of the state, created wealth for an indigenous industry.

About Author

Mr. Dev Garg
Mr. Dev Garg

Mr. Dev Garg

Mr Garg, Director at Shri Lal Mahal Limited is a scholar of Finance and holds a BSc degree from Warwick University UK. He manages the East African operations and finances of the company. Enclaved in his business from a young age, he has worked in countries like Nigeria, Dubai, UK, Kenya and India.