Episode 320: How Fear Turned A Surplus Into Scarcity : Planet Money The mystery why there was a global rice shortage and ever-increasing prices, all while countries were hoarding rice.
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Episode 320: How Fear Turned A Surplus Into Scarcity

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Episode 320: How Fear Turned A Surplus Into Scarcity

Episode 320: How Fear Turned A Surplus Into Scarcity

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MARK ZANDI: The labor market has got a long way to go. It's not where we need it to be. It's stabilized much better than I had feared just a few weeks ago.



Hello, and welcome to PLANET MONEY. I'm Alex Blumberg.


And I'm Dan Charles. Today is November 4, 2011. And that was Mark Zandi you heard at the top, talking about jobs.

BLUMBERG: Today on the podcast, the story of one of the most destructive and mysterious food shortages in recent memory. It sent shock waves throughout the world. And the most mysterious thing about it - about this shortage of food, rice specifically - there was more than enough to go around.

CHARLES: This is the epic story of a shortage that wasn't. It's a global caper of good intentions gone wrong, of shadowy trade deals, corrupt government officials and warehouses full of rice in a country that did not want it. That's all coming up. But first, today's PLANET MONEY indicator with you, Alex.

BLUMBERG: All right. I'm going to do my best Goldstein. Today's indicator - nine, 9 percent. That is the unemployment rate according to government figures released this morning.

CHARLES: Nine - is that good or bad?

BLUMBERG: Well (laughter), nine is bad. It's definitely bad. Nine percent unemployment - that's very high. But if you want to look on the bright side of things, you can find data in this report that would help you do that. The economy did create jobs, and the unemployment rate did tick down a little bit. It was 9.1 percent in September. It's 9 percent now in October. And in almost all the categories you look at, things are improving, if ever so slightly. But remember how I said it was going to do my best Goldstein?

CHARLES: Yeah, do it.

BLUMBERG: So I've got to hit you with the negative here. Things are still really bad. They are improving very slowly. We still have almost 14 million people unemployed in this country. We've still lost millions and millions of jobs since the peak - jobs that have not come back yet. And most people who look at this stuff think we're in for a really long slog.

CHARLES: Alex, one of these days we need to come up with an upbeat indicator.

BLUMBERG: And one of these days, we will. Unfortunately, I think it's going to be a couple of years from now. All right, shall we move onto the podcast?

CHARLES: Yes. Yes, let's do it.

BLUMBERG: So the fiasco we're going to tell you about today, Dan, you've been you've been working on for a couple of weeks now. And we should say, you are a correspondent with NPR's science desk. You've been...

CHARLES: Right. I cover food and agriculture.

BLUMBERG: And you've been hanging out here at PLANET MONEY HQ for a while and doing stories for us, and we're very delighted to have you. Most of the reporting for this story you did, and you're going to tell the bulk of the story. I'm going to be jumping in now and again. And just to set it up - this story basically revolves around fear - panic, actually. It's about yelling fire in a crowded food market. But the food market we're going to be talking about is a market with a few billion people in it. And it only takes a little bit of panic to hurt a lot of people in a market like that.

CHARLES: Right. This story is about rice. And there are a couple of things you really have to understand about rice. First of all, in a big part of the world, rice is really, really important - more than you may realize.

DAVID DAWE: Rice is - Westerners who haven't lived in Asia for substantial periods of time, I think, just don't appreciate it in that it's - it just is so politically important. It's unbelievable.

CHARLES: That's David Dawe. He's a senior economist with the U.N.'s Food and Agriculture Organization in Bangkok - in Thailand. For billions of people in Asia - really, billions - rice is the centerpiece of the culture. It's part of every meal. It's been that way for centuries - millennia, really. So that's the first thing to understand. But it leads to the second thing, which is - rice is so important, Asian governments run the rice trade - or at least they try to. One of the most important things a politician can do in Asia is keep the price of rice stable so it doesn't bounce around a lot. So what happens is they are big players in the rice business...

BLUMBERG: These Asian governments.

CHARLES: The Asian governments do. They buy the rice from farmers. They turn around and sell it to consumers. They fix prices really. They keep everybody happy - or at least they try to - because stable rice prices make people feel secure, like things are under control.

BLUMBERG: So Dan, how do they do that? How do they intervene in the rice market?

CHARLES: Well, one of the big things they do is they make sure that rice doesn't just leave the country. If you're an exporter, if you're a shipper, you cannot just take the rice and ship it abroad without the government's permission.

BLUMBERG: And these are governments in Vietnam, Indonesia, like - China.

CHARLES: Pretty much all across Asia, actually. Rice is a heavily government-run enterprise, and it's the centerpiece of life. So what that means is the international trade in rice turns out to be really kind of strange. There's a man named Tom Slayton who has followed the global rice trade for 35 years, first for the U.S. Department of Agriculture, then for private clients. This is how he describes it.

TOM SLAYTON: Rice is a very opaque market. There's a lot of secrecy. Most of the business, historically, has been done through direct negotiations, so it's always been shrouded in the shadows.

BLUMBERG: (Laughter) Opaque, shrouded in shadows - I mean, it sounds a lot like he's describing, like - I don't know - an arms dealer or something.

CHARLES: Yeah, that's actually not a bad comparison. Governments treat their rice supply, literally, as a matter of national security. They call it - this is the term they use - food security. Rice is so important to governments that they don't just let private companies run it. And this characteristic of the rice trade - this is at the root of the great rice fiasco that happened about four years ago.

BLUMBERG: The great rice fiasco - I can't wait to hear. All right. Let's go.

CHARLES: So it started with a single decision in the offices of the government of India. P.K. Joshi, who was director of a government-funded think tank on food policy at the time in New Delhi, says the government declared that it would try to guarantee food for everybody.

P.K. JOSHI: That is, they write the Food Security Act. So this program required, I think, more than 60 million tons of rice and wheat.

CHARLES: That's right. You heard that correctly, 60 million tons of rice and wheat to give away to the poor.

BLUMBERG: And this is part of the Food Security Act - that's what he said?

CHARLES: That's right. Now, the thing is, at this time, Indian officials were starting to get worried about how they were going to buy some of this grain. Wheat, in particular, was getting really expensive. Now, there was no problem with rice. The country had plenty of rice - more than it needed, in fact. India was the world's second-biggest rice exporter. But the government officials in India started thinking, maybe we're going to need some of that rice here at home. So in October of 2007, the Indian government made it illegal for rice traders to sell most of the country's rice abroad. They banned rice exports. Now, nobody realized this one move could set off a global crisis. Well, actually, a few people did.

PETER TIMMER: We saw it coming and did everything we could to keep it from happening.

CHARLES: This is Peter Timmer. We're going to hear a lot from him in this broadcast. He's one of the world's top experts on the rice trade. He was semi-retired from teaching economics at Harvard, but the events in India - they brought him out of retirement in a hurry.

TIMMER: When it was finally announced, it was - holy shit.

CHARLES: What did you do to try to keep it from happening?

TIMMER: Well, you try to get word through channels to key players in the Indian government that a ban is going to be very, very difficult for the world rice market. And not only did we not succeed, the prime minister made it very clear - he said this on public television - I am the prime minister of India, and I need to be responsible for the food security of Indian citizens. I am not responsible for food security in the world.

CHARLES: That Indian decision - that did exactly what Peter Timmer was scared it would do. It set off a chain reaction all over the world. Now, each one of these actions around the world was completely understandable. But together, they added up to this disaster. So the first thing that happened was the Indian ban on exports. It meant that there was just less rice for sale. And when supply goes down, you know from your economics class what happens next.

TIMMER: We saw it, you know, the next day. You know, the next day, prices in Bangkok go up $75 a ton.

CHARLES: That's about a 20 percent jump.

BLUMBERG: That's huge. Like, one day - overnight. It's like gas going from $2 to $2.40 in one night.

CHARLES: Right. Actually, it's not so much compared to what we're going to hear later in the story, but it was enough to get people's attention and it was enough to make them react. People said - if rice is getting more expensive, we need to buy as much as we can right now. Now...

BLUMBERG: Perfectly reasonable reaction - people see the price going up, and they're like - well, we've got to get our hands on as much as we can right now.

CHARLES: Yeah, absolutely. And in fact, people like - you know, even big shot economists like Peter Timmer.

TIMMER: I hate to say this - the previous afternoon, I'd gone to Trader Joe's, and I picked up six boxes of rice because I knew it was going to be really expensive in about two weeks.

CHARLES: You were a rice hoarder.

TIMMER: I was a rice hoarder. I felt so embarrassed. But it's a perfectly rational thing for individuals to do.

CHARLES: Now, what goes for individuals goes for governments, too. One after another, countries announced they were going to do, more or less, what Peter Timmer had done. They were going to hoard rice. So January 2008, Egypt says it's banning rice exports. February, Vietnam restricts exports. April, Thailand, the world's biggest rice exporter - officials there float the idea of a rice cartel, kind of like OPEC, that would restrict supply of rice going out to the rest of the world.

BLUMBERG: And this hoarding feeds on itself - right? I mean, the hoarding itself creates the shortage, which sends prices higher, which creates an incentive for even more hoarding. And the crazy thing is this is all going on while there's really no shortage of rice. Right? There's plenty of rice.

CHARLES: Right. It's like - you think of it as a run on the bank. You know, if everybody wants all their money from the bank all at once, they're not going to get it. Right? It's the same thing. If everybody, all of a sudden, wants to get their hands on all the rice they'll need for the next four months, there just is not enough to go around. Now, this puts an especially big squeeze on countries that need rice - that don't grow enough of their own, that need to go out and buy it from other countries. That included a lot of countries in West Africa, but especially the Philippines. Filipinos eat a lot of rice. It's more than they grow on their own, so it is the world's biggest rice importer.


CHARLES: Yeah. By April, the Philippines had taken over center stage of the rice crisis. And it became kind of like an incubator of the crisis. Not only did it intensify the crisis there, it also spread it to the rest of the world. It was a mixture, let's say, of public incompetence and private greed.

BLUMBERG: A potent mixture, if ever there was one.

CHARLES: Yeah. First, the incompetence. Bruce Tolentino was watching it from far away, in his offices at The Asia Foundation in San Francisco. He used to be a top official in the Philippine ministry of agriculture.

BRUCE TOLENTINO: The government started to send out messages which were, at the beginning, kind of strange. You had the agriculture minister going on live TV saying, please, everybody, reduce your rice consumption. Don't have too much rice.

CHARLES: So when the government - when the minister of agriculture says eat less rice, what's the response?

TOLENTINO: It was taken, I believe, as a signal to hoard - that the country was running out of rice and that the safe thing to do is to go out, buy as much as you can and hold onto it.

BLUMBERG: People of the Philippines, we have noticed a little bit of smoke in our crowded movie theater. Please move slowly and cautiously to the door.


BLUMBERG: Doesn't work.

CHARLES: Right. Exactly. So stores ran out. First, the cheap rice sold out, then the expensive, high-quality rice disappeared.

BLUMBERG: So you've got people hoarding. You've got prices going up.

CHARLES: And then came the greed. In a situation like this, if you're in a position of power, you can make a lot of money. We now know - thanks to court documents - that this is, in fact, what happened. Corrupt officials going right up to the president of the Philippines were profiting from this.

BLUMBERG: From the panic.

CHARLES: From the panic. And this is how it worked - and again, this is all from court documents and experts. Let's say you run the National Food Authority of the Philippines. You buy most of the rice in the country. Your favorite supplier from abroad is a state-run company in Vietnam called Vinafood. Peter Timmer, our economist - he takes the story from there.

TIMMER: You announce you'll pay any price for rice, and so you sign a contract - you, the National Food Authority of the Philippines, sign a contract with Vinafood in Saigon. Let's say it's a thousand dollars. Vinafood is able to go back to Vietnamese farmers, who don't know really, what's going on and don't have any mechanism to do anything except through the monopoly exporter, and pays them $500. So now there's $500 of profit per ton, which you quietly split.

BLUMBERG: So now this is, like, another thing that's contributing to drive up the price, right? You've got the artificial shortages. You've got the hoarding. You've got the lack of exports. And then you've got corrupt politicians conspiring to drive up the price even more because they profit from it.

CHARLES: Right. And those corrupt deals - they actually drove up the price by hundreds of dollars a ton. But what they also did - they unleashed full-scale rice fever, and that fever jumps from the Philippines to the rest of Asia.

TIMMER: What happened was people panicked everywhere, even in Hong Kong, supermarkets ran out of rice. In Ho Chi Minh City, for heaven's sakes, the center of the second-largest rice exporting surplus in the world, supermarkets and rice markets got cleaned out in two days.

CHARLES: And the price of a ton of rice on world markets during those first four months of 2008, it went from $350 to $700.

BLUMBERG: Oh my God, it doubled?

CHARLES: Uh-huh. And then it almost doubled again. It went up to $1,200.

TOLENTINO: I was in San Francisco. Right?

CHARLES: This is Bruce Tolentino again, with The Asia Foundation.

TOLENTINO: Filipinos living in the U.S. would go into Costco, and they would buy up all the rice they could buy and stick it into boxes and send it to Manila. And Costco, in fact, ran out of supply.

CHARLES: You actually knew some people who were doing this?

TOLENTINO: Oh, yes. I mean, in San Francisco, in fact, the - I went to Costco. We went there and we observed this for ourselves, and - in fact, we were looking around for rice, and we couldn't buy any.

CHARLES: (Laughter).

TOLENTINO: So we resorted to having some Uncle Ben's.

BLUMBERG: And this is because people in the Philippines can't get rice, so they're asking their relatives in San Francisco to send it to them?

CHARLES: Well - or people living in San Francisco hear that there's a rice shortage in the Philippines and immediately run to Costco and get some rice. Of course, you know, for Americans, this run on rice at Costco was actually kind of funny. It was funny enough to make it onto Stephen Colbert's ThreatDown.


STEPHEN COLBERT: (As Himself) Threat No. 2 - rationing. The global food shortage has finally become an important story because now it is affecting me. Costco and Sam's Club are now both rationing rice. You can't buy more than 80 pounds in a single visit.


COLBERT: Only 80 pounds?


COLBERT: (As Himself) How am I supposed to make my famous kiddie pool paella?


CHARLES: Now, you have to say, this whole situation was not so funny for a lot of people in the Philippines.

KRIZ CRUZADO: Yeah, most people are actually scared. They were really angry with the government, of course.

CHARLES: That's Kriz Cruzado. She lives in Davao City in the Philippines with her mother and two younger brothers. I spoke to her by Skype.

CRUZADO: We could only afford to buy 3 kilos for one week, and that was very little, so we went on a diet kind of.

CHARLES: You actually ate less because it was more expensive?

CRUZADO: Well, yeah, because it also depends on how much you earn, right? So at that time I was the breadwinner, and I was the only one earning for the whole family. And we had other needs like education and other food, not just rice. Yeah, we ate less, I guess.

CHARLES: And you could say she was actually one of the lucky ones. Some people literally went hungry. Ben Flores is a janitor. He lives outside Manila.

BEN FLORES: Before that, I used to eat rice every morning. So I really lost weight because of that.

CHARLES: And you have to understand, things like this - people eating less, people losing weight - this kind of thing is happening all over the world. Rice prices are climbing. It's making poor people even poorer - in Bangladesh, in Senegal, in West Africa, in Haiti.

BLUMBERG: And I know I'm starting to sound like a broken record. But people are going hungry, there's a shortage, prices are rising - even though nothing has changed in the global rice supply, right? There's plenty of rice to go around.

CHARLES: Exactly. It's all driven by expectations and fear.

BLUMBERG: And that sort of converges into this vicious cycle, right? Like, the more people fear, the more they hoard, which leads to more shortages, which creates more fear.

CHARLES: Right. And they're afraid because rice is so important to them. And so - because it's so important, they're willing to pay almost anything to get their hands on it. So back to our economist, Peter Timmer.

TIMMER: How do you break those expectations? If you're panicked, how do you stop a panic?

CHARLES: How do you stop a panic?

TIMMER: You find extra supplies of rice that the market doesn't know about.

BLUMBERG: Wait a minute. What? Like a magic mountain of rice somewhere in the world that the world doesn't know about?

BLUMBERG: Yes, yes. Believe it or not, there is such a mountain of rice. So here's where Tom Slayton, the veteran rice observer - he comes back into the story. He joins forces with his friend Peter Timmer, the economist.

SLAYTON: Peter and I decided we would quote, unquote, "save the rice market."

TIMMER: Tom called me up and said, Peter, there's 1.5 million tons of very high-quality rice sitting in Japan, the WTO rice.

BLUMBERG: Wait a minute. The WTO rice? What is that?

CHARLES: Yes, yes. WTO as in World Trade Organization. Remember how we said that the world rice trade was this - an opaque market? Well, this rice in Japan exists because of a strange, bizarre quirk in world trade. For years and years, U.S. rice farmers in Louisiana and Arkansas - they wanted to sell rice to Japan. But the Japanese government kept that rice out with super high tariffs to protect their own rice farmers. The U.S. farmers - they went to international trade court basically, and they won. So Japan has to buy some U.S. rice every year, even though they don't want it. But the Japanese just store it. They don't sell it to their consumers.

BLUMBERG: Wait, so the Japanese are forced by international law to buy American rice, and then they don't actually do anything with it. Why?

CHARLES: So the Japanese government claims that their consumers don't like American rice. The U.S. rice industry - they say Japanese officials won't let American rice into stores because they're petrified Japanese consumers might actually like it and want more of it. In any case, they have this rice, but they're not allowed to just turn around and sell it abroad.

TIMMER: So they let it sit for years and years and years until it finally deteriorates, and they use it for pig and chicken feed.

CHARLES: Japan is like the roach motel for rice?

TIMMER: Got it.

CHARLES: (Laughter).

TIMMER: And so Tom and I decided that we needed to get that rice into play.

CHARLES: Peter Timmer and Tom Slayton - they start a lobbying campaign. They say to the U.S. government, make an exception to the rules. Let the Japanese sell this American rice just this once. It took a few weeks. But in mid-May 2008, the U.S. agreed to this. And the Japanese announced they were negotiating to sell rice to the Philippines. And that, it turned out, was enough - just this announcement. It broke the price-escalating chain reaction. All of a sudden, perceptions changed. People believed that there really was enough rice for everybody, and then behavior changed.

TIMMER: And the next day, the price fell $200 a ton. And in two weeks, it was back to half what the peak was.


TIMMER: So that's how you should - you prick the bubble.

BLUMBERG: I have a question, did they ever actually sell the rice?

CHARLES: No, they never actually sold the rice. They never shipped the rice. It was just the perception change.

BLUMBERG: So they literally had to just trick the world into believing what was actually true, that there was enough rice for everybody.

CHARLES: Exactly.

BLUMBERG: Wow. That is such an amazing story. And I'm pretty confident in saying that most of the economists that you would talk to - right, left or center - would say what the lesson here is. The moral is that you shouldn't have sort of massive government intervention in a global market like rice. You know, you got first India interfering, then other governments coming in and restricting supply. So to economists, the solution would be pretty clear. You know, let the rice flow where it's needed most. Have it be a global market like every other commodity out there, where it'll just go where it's needed. You'll get lower prices, increased supply.

CHARLES: Yeah, absolutely. And this is the solution that the World Bank and mainstream economists have been pushing for decades now. But David Dawe, the economist with the Food and Agriculture Organization in Bangkok, he says - you know what? - those points about free trade - they may all be true, but they are completely irrelevant.

DAWE: I think, actually, if we could get there, it would be very good. But I think that's just a pipe dream. And I don't think it's worth wasting any more time on this kind of stuff. I mean, it's really discouraging to see how much effort the economics profession puts into measuring how much better we would be off if only we would follow free trade. They're just totally ignoring the political realities.

CHARLES: And the political reality in Asia, according to Peter Timmer - countries there have learned exactly the opposite lesson from this experience.

TIMMER: What's really interesting is it has reinforced - every country I know in Asia has reinforced their determination not to let price spikes happen in their country.

CHARLES: Because this is the paradox of the crisis. The countries that caused it, that restricted exports - they didn't suffer from it. India cut off exports, kept rice at home, and people there did not see the price of rice go up at all. China had huge stocks that it did not sell. It was fine, so was Indonesia. In those countries, people were contented. Governments did not fall.

TIMMER: The lesson is very, very clear that in the short run, politically, you really do have to put that food security and stable rice price agenda first and foremost.

BLUMBERG: So the lesson that these governments in Asia have learned is the exact opposite of what the economists would want them to learn. Their lesson is - we need to intervene more. We need to rely less on global trade.

CHARLES: That's right. And Peter Timmer says you're not going to stop governments from intervening in the rice market, but there is one thing you can do. You can make the system work a little better.

BLUMBERG: So even though there's not the economists' dream of perfect free market, you would be able to avoid, maybe, these spasms of hoarding, these crazy price spikes.

CHARLES: Right. It's all about managing expectations. Peter Timmer - he's pushing ideas like making sure countries share information about how much rice they have and what they plan to do with it. And the basic point is - if there really is plenty of rice in the world, people should know it so they won't panic.


HEY MARSEILLES: (Singing) These days are not fast. These times will not last, so they say, but I'm having trouble believing.

CHARLES: Send us your questions or comments to planetmoney@npr.org.

BLUMBERG: Or come to our blog, npr.org/money, where we have a great chart about the unemployment rate - 32 Different Ways of Looking at the Unemployment Rate. You can also find us on Facebook, Twitter or Spotify. I'm Alex Blumberg.

CHARLES: And I'm Dan Charles. Thank you for listening


HEY MARSEILLES: (Singing) Try to settle soft in the canopy we've lost. You are getting all you can from my hurting, from my hurting.

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