Comparison of Production Costs and World Market Adjustments to Changes in Trade Policy for Japonica Rice
Rice remains the dominant commodity in Korea agriculture and one for which international trade issues remain vitally important. Two closely related international issues are comparisons of costs across countries and how the international market for rice would be likely to evolve if trade policies were to change in accordance with multilateral reductions in trade barriers and subsidies under a new World Trade Organization (WTO) agreement. In this report we focus exclusively on the japonica rice, the type grown and consumed in Korea.
Part 1 of the full report deals with the competitiveness of rice production in three leading producers of Japonica rice, the United States, China, and Korea. The United States and China are the most important Japonica rice exporters. Korea produces and consumes domestically and imports a quantity equal to four percent of domestic consumption. China also consumes most of its large production of Japonica rice domestically. The objective of this part of the report is to analyze the cost structures of Japonica rice production in these three countries, and identify underlying factors or constraints that affect the cost structures. We also consider more broadly the cost competitiveness of rice production in these countries.
This part of the report is in three sections. We first present a country specific analysis from the historical perspective using rice production and cost data for the United States and China. Using historical data, country analysis provides a general background of each county’s rice production and the cost structure. Japonica rice production in the U.S. is concentrated in the Sacramento Valley located in the Northern part of the Central Valley. For the last decade, japonica rice acreage has been fluctuating between 450 thousand and 550 thousand acres with yields of about 3.6 to 4.0 tons per acre on a paddy basis. Export markets have been important for the California rice industry. California exports, on average, about 30-40 percent of its 2 million tons of rice production. Since the Uruguay Round Agreement (URA) in 1994, Japan has been an important importer of California rice. Total cost per unit of output fluctuates by yield but have trended down in real terms in California and were about $220 per ton on a paddy basis in recent years. Japonica rice area in China is in two regions, the three northeastern provinces and the broad north and central coastal provinces. Production and consumption of Japonica rice both grew rapidly in the 1990s to more than 40 million tons. Net exports are only a small fraction of that, less than five percent. Cost in China rose in the 1990s before declining more recently. They were about 40 yuan per jin in 2002 or about $110 per ton.
Once country specific analyses are presented, we provide the comparative analysis of cost competitiveness of the three countries, the U.S., China, and Korea. Total costs in Korea are about $660 per ton. We provide comparisons across countries that break these total cost differences into elements that account for the differences. Land cost is clearly the largest difference, with rents in Korea about four times rents in California compared to a zero land rent in China.
China is by far the largest Japonica rice producer, and some recent emerging trends deserve attention. As incomes in urban China have grown the demand for higher quality Japonica rice has also grown. As income growth spreads further inland and to rural areas, the demand for quality Japonica rice will rise relative to lower quality and to Indica rice. Against this is the trend to consume more meat, vegetables and fruit and less rice overall. With rapid consumption growth matching or exceeding future production growth China’s export potential is limited. However, given its very large production and relatively low costs of production, China will have available supplies for the high priced markets in Korea and Japan unless access expands very rapidly in those countries.
Part 2 of the report reviews the market and policy situation and outlook for japonica rice on a global basis. We describe briefly the most important current policies that affect international trade in Japonica rice. We also examine some alternative policy scenarios that reflect potential outcomes of the Doha Development Agenda negotiations in the WTO and the negotiations for additional access that Korea recently completed with its trading partners. In particular, we consider likely global market effects of expansion of access into the market in Japan and reduced subsidy for Japonica rice (among other crops) in the United States.
We use an equilibrium displacement model, specified in log linear terms to ask how market prices, quantities and other aggregates change when trade barriers are relaxed and production subsidies are reduced. This is applied to a baseline of what would obtain with no such policy changes. The model includes Japan, Korea and the United States as individual countries with policy changes. China plays a major role. Other exporters and other importers are placed into two aggregates in the model. Long run demand and supply elasticities are drawn from the empirical literature.
Results show that when U.S. subsidies decrease by 50 percent in addition to the full implementation of quota expansion in Korea and Japan, U.S. production decreases by more than 30 percent, and the U.S. is no longer an exporter. Instead, China increases its exports by 53 percent and the rest of the world increases exports by 14 percent. The world price rises by only 0.7 percent.
The Korean market changes little despite expanded imports. Since Korea imports solely on the basis of its quota schedule, the Korean market for rice is not connected to world price movements during this period. Further, these quota amounts remains small enough relative to the size of the Korean market such that any long run price effects are moderate. The rice price in Korea decreases by about one percent and production falls by a maximum of 3.9 percent.