Agricultural commodity prices are by their very nature seasonal, that is, they fall to their lowest around harvest and rise consistently as the lean season progresses. Although this cycle is fundamental, certain shocks to either supply or demand crash or spike prices as the case may be.
Recent events regarding the decision of the Federal Government of Nigeria to close all land borders have dislocated the price of rice which remains a key staple consumed in the country. A key reason given for the border closure is the need to halt foodstuff smuggling into the country, and since the closure has gone into effect a number of consumers have registered their feelings about the effects of the move on consumer prices of rice. We instead focus on the outlook for the paddy rice market in Nigeria for 2019, refraining from discussing the validity or otherwise of the closure pronouncement but seeking to provide insights based on historical evidence and our understanding of the commodities market.
The domestic market for paddy rice consists of farmers, traders and merchants as elements on the supply side while paddy rice millers (traditional and modern) and households represent the demand side. Historically, the price and quantity of imported parboiled rice available in markets across the country have been key factors determining the price levels of paddy rice produced domestically.
The closure of the borders has, however, set the pace for a rather volatile price environment in the paddy rice markets with Intra-month gains in October climbing up by 9.80% following the increased scarcity in rice supplies across markets in the country. This price behavior has shifted the support for paddy rice prices from NGN125, 000/MT as witnessed at the end of the past marketing year (2017/2018) to NGN140, 000/MT which we currently experience (2018/2019). By implication, supply side agents (farmers, traders and merchants) are faced with a more profitable year ahead.
Barring any increase in the dry season activities, the likelihood of increased raw material acquisition costs by paddy rice processors has been heightened as price appreciation and unavailability of alternatives will increase the willingness of farmers to trade at the open markets rather than sell to processing companies. In addition, the risks of counterparty risks (side selling) in forward contracts are heightened as cash payments by middlemen and village buyers induce farmers to divert commodities.
Chart 1: Price Movement in 2018/2019 Marketing Year
Our outlook for paddy rice prices in 2019/2020 marketing year is that of a 15% rise in prices as the impact of demand spike is expected to be mitigated, albeit marginally, owing to improved weather conditions in core producing areas across the country.
However, if the trade stalemate remains till November, rice prices could go higher than 20% as processors ramp up procurement to fulfil the seasonal increase in rice demand witnessed in December.
In conclusion, paddy rice market will be characterized by significant price hikes, violations of agreements under forwarding contracts and increased returns for supply-side agents in the paddy rice markets.
This post first appeared on the AFEX blog on October 25, 2019