Rice Prices Rally Boosting Demand for Cheaper Overseas Supply

Rice prices rallied to a six-year high amid the best crop since 2008 in Japan, boosting demand for cheaper overseas supply and raising questions about a government policy that protects producers. Prices rose as the nation’s largest farmers group paid more to collect rice from growers, who aren’t in a rush to sell under the government’s income-support program, said Ryo Kimura, the chairman of Japan Rice Millers and Distributors Cooperative.

Demand for local rice is forecast to drop 1.5 percent to 7.98 million tons in the year to June 30, the lowest level in at least 17 years, according to the ministry. High prices curbed demand from the food industry, while consumers prefer to eat more bread and meat, said Chino, who has trade grains for more than three decades.

Japan agreed to give minimum-market access to rice- exporting countries at the Uruguay Round of world trade talks in 1993, buying 770,000 tons a year. Most of them are used for production of liquor, processed food and livestock feed. The U.S. was the top supplier to Japan last year, followed by Thailand.

The average price of domestic food-rice sold by shippers to wholesalers jumped 10 percent from a year ago to the highest level since 2006, said Takashi Amou, director of the agriculture ministry’s policy planning division.

Rice in Chicago has climbed 3.6 percent in the past year. Demand from Japan’s food industry for foreign grain reached 88,840 metric tons in an import tender this month, more than tripling from the state-set ceiling of 25,000 tons, as retailers sought cheaper alternatives. The ministry limits the volume of food-rice imports to protect farmers from foreign competition. Higher rice prices erode earnings of restaurant-chain operators such as Yoshinoya Holdings Co. (9861) and Matsuya Co. (8237)

“The current policy offers benefits to producers at the expense of consumers,” said Nobuyuki Chino, the president of Continental Rice Corp. in Tokyo. “It won’t be sustainable as rising prices will weaken demand for domestic rice further.”

“The rising cost of rice was the largest reason” that profit declined in the first half, said Yuriko Handa, a spokeswoman for Tokyo-based Yoshinoya, which reported a 29 percent drop in operating profit in the six months ended Aug. 31. “The import volume is not large enough to fulfill our demand.”

The ministry, which has maintained the ceiling on food-rice imports at 100,000 tons a year for the past 11 years, has no plan to expand the volume, Amou said in an interview in Tokyo.

Food-rice prices in Japan, which jumped 17 percent in the year ended Aug. 31, extended gains this marketing year as National Federation of Agricultural Co-operative Associations increased payments to individual growers by 10 percent to 20 percent, said Kimura at the rice millers organization.

The agriculture group, known as Zen-Noh, plans to collect 12 percent more rice to 3 million tons this year, spokesman Yoichi Nobuta said, declining to confirm the price increase.

The price averaged 16,650 yen ($203) a bag in September, rising from 15,196 yen a year ago, according to the ministry, which compiles data every month. One bag contains 60 kilograms.

Farmers are reluctant to sell rice at low prices as their income is supplemented by the government program that provides 15,000 yen per 10 ares of paddies to each grower, Kimura said in an interview in Tokyo. One “are” equals 100 square meters. They also increase rice sales to consumers through internet to maximize profits, reducing shipments to Zen-Noh, he said.

The ruling Democratic Party of Japan, which won farmer votes from the Liberal Democratic Party to gain power in 2009, introduced the program of paying cash to those who produce rice in accordance with the ministry’s policy of balancing output with domestic demand for price stability.

The program drew criticism from members of an advisory panel to Japan’s Finance Minister this month, as they proposed to review spending that didn’t increase efficiency in the agricultural sector.

“The program was originally aimed at supporting farmers in case the government promotes free-trade agreements and lowers tariffs on imports,” said Chino at Continental Rice. “The ruling party has failed to pursue the objective because of strong opposition from producer groups.”

Prime Minister Yoshihiko Noda has put on the agenda for the Dec. 16 election Japan’s participation in the negotiations over the Trans-Pacific Partnership trade pact, raising the prospect of eliminating barriers on farm imports. The chairman of the Central Union of Agricultural Co-Operatives, Japan’s biggest farm lobby, has said it will support candidates opposing the participation in the trade-liberalization pact.