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When India imposes an immediate export ban on rice, it’s time to sit up and pay attention.

On July 20, India announced an export ban on non-basmati white rice and broken rice, which account for about half of all Indian rice exports. Ships already loaded were still allowed to leave ports. After that, only basmati rice may be exported.

Over the last 15 years India has become the largest exporter of rice and exported around 20 million tons in 2022, followed by Thailand and Vietnam with 7.5 and 6.7 million tons, respectively. Therefore, the export halt of the top two rice varieties has a significant impact on the market.

Rice is a staple food for more than three billion people. And so, the ban has further impacted the global rice market, where prices have already risen by 15-20% since September 2022 due to  the war between Russia and Ukraine, which has driven up prices for other grains.

Global agricultural and food value chains are under pressure

Rice from India, palm oil from Indonesia, sugar cane from Brazil or even rapeseed from Australia - all these foodstuffs are likely to be particularly affected by the El Niño climate phenomenon and experience a decline in agricultural yields.

Poorer harvests will put pressure on agri-food value chains as a whole, and 2024 is likely to be a year of extreme tension between supply and demand in the sector. Disruptions will negatively impact both the production of key exporting countries (Australia, Brazil, U.S.) and demographic hotspots that should be self-sufficient in food (China, India). The pressure on supply will therefore be twofold.

So, it would not be surprising if food prices rise next year, leading to an unwanted butterfly effect, similar to the AdBlue shortage last year. Various El Niño episodes over the past 20 years have often led to inflationary pressures on food prices in Southeast Asia. Rice, which accounts for a large share of domestic grain consumption in the region, is particularly vulnerable to the effects of El Niño, as the water-intensive crop suffers greatly from low rainfall. As a result, countries where the agricultural sector plays an important role may suffer significant losses in income and employment.

No short-term solution

How quickly the balance between supply and demand is restored depends on both the Indian government and weather conditions. As overall demand for rice continues to rise, many countries where agriculture accounts for a large share of GDP and jobs could be severely affected by the negative impact of El Niño on rice production.

The extent to which other Asian and African countries and rice-based products will be affected by the export freezes will depend on the duration of the ban and the extent to which these countries and companies can diversify their purchases in the medium term, provided that the export restrictions do not lead to further price increases in Asian and African countries, which in turn could dampen demand from price-sensitive buyers.

When the shelves are empty, how might the problem be solved?

Unlike the global chip-shortage caused by the closure of production plants, or the shortage of toilet paper caused by a sudden surge in consumer demand during the Corona pandemic, the export ban on rice was imposed by the Indian government to curb high price increases in the country.

And so, India's export ban on white non-basmati and broken rice will have far-reaching effects both on the global rice market and the price that end consumers pay.  So-called panic buying is already being reported, with the result that many supermarket shelves are already empty.

These challenges lead to the need to build more resilient supply chains to avoid future difficulties. Southeast Asian countries have learned from previous El Niño events and invested in risk mitigation, and reduction measures that can be applied to the supply chain.

Here are some of those measures:

Diversification of suppliers and raw materials

With India's ban on rice exports, businesses and consumers could face higher rice prices and shortages. However, there are alternatives to rice that both consumers and businesses could consider.

To reduce the risk, companies that need rice for their production could switch to cassava as a substitute product or spread the sourcing of rice across multiple countries and suppliers to reduce dependence on one main supplier.

Replenishment of stocks

Many Southeast Asian countries already have safety stocks that they can use to meet short term demand. In 2011, the ASEAN Plus Three Emergency Rice Reserve (APTERR) was established to calm the rice market, as the ASEAN Plus Three countries (China, Japan, and South Korea) are both large rice consumers and producers.

For example, Japan released its rice reserves in 2008 to calm markets when the Philippines experienced hyperinflation in rice due to supply shortages.

But carrying more inventory is not automatically the right solution, as it naturally increases storage costs and ties up capital. By incorporating inventory optimization strategies, companies can calculate the right location and quantity of finished goods, intermediates and raw materials. This can lead them to stock more of some items and less of others at certain locations.

Improving cooperation

Southeast Asian countries, through the formation of ASEAN, are collectively seeking to minimize risks through effective information sharing and coordination of their efforts to mitigate and adapt to climatic uncertainties.

Business visibility and collaboration with suppliers, contract manufacturers, logistics service providers, and other trading partners can help ensure relationships with key rice suppliers and supply.

However, to minimize the risks, companies should establish close and trusting collaborations with their partners along the entire supply chain. In this way, they can not only minimize risks, but also work together to build a sustainable supply chain.

For more information on a resilient, customer-centric and sustainable supply chain, see the latest Oxford Economics Research.