This week: Rice. Sunday Stabroek Perspective Stabroek News April 18, 1999 Dr de Groot is a rice farmer, miller and exporter. He is presently the President of the Guyana Rice Millers and Exporters Development Association, the Vice-Chairman of the Private Sector Commission and a Member of the Guyana Rice Development Board The rice industry in Guyana Agriculture is the single most important segment of the economy, both in terms of foreign exchange generation and the number of persons employed. The Rice Industry is the most important agricultural activity for the private sector, being second only to sugar in importance in terms of foreign exchange earnings, but is the largest user of agricultural lands, using approximately 200,000 acres. The Rice Industry supports over 10% of the nation's population directly and many more indirectly. It contributes in excess of US$80M annually to the economy, 12.5% of export earnings and contributes 20% of the agricultural GDP. Guyana's rice industry has undergone tremendous changes over the years. During the 1980's the industry experienced continuous decline with the agricultural GDP falling by an average of 3% per annum between 1981 and 1990. At that time the economy's major productive sectors were influenced by government intention, through price controls and foreign exchange rationing. These actions created serious distortions in resource allocation and an overall decline in production. The rice industry was no exception to this trend. The government at the time owned all the major rice mills. They decided what price the many small millers had to pay farmers for paddy, then in turn purchased all the rice at predetermined prices from the millers. The government's agency then in turn exported all the rice and received the benefits from these sales. During the late 1980's and early 1990's the Guyana government launched a major structural adjustment programme. This required a reversal of the previous set of policies and placed emphasis on private sector led development. For the rice industry price formulas were abandoned and farmers and millers were allowed to sell freely on the domestic and export markets. Around the same time government began divesting its mills leaving only one remaining under government control. These changes improved the competitiveness of the market place and once again rice farmers had the incentive to invest in the industry. This triggered a rapid response that was reflected in increased production and export. Production, milling and exports are now almost exclusively in the hands of the private sector. Some 15,000 households are involved in production and directly or indirectly the industry provides employment for an additional 50,000 persons. There was a spectacular development in the local rice industry between 1990 and 1996 mainly as a result of an artificial trade measure that allowed rice produced in ACP countries, mainly Guyana and Suriname, to be semi-milled in OCT countries before entering the European Union, free of any duties and quotas. This became known popularly as the OCT route. An OCT country is a former European colony that still maintains a significant relationship with that European country. These countries in the Caribbean include Montserrat, Curacao, Bonair, Turks & Caicos, etc. Rice shipped via the direct route to Europe attracted a 50% levy at the time (the levy was reduced to 35% in 1998, but this reduction was made retroactive to 1st January, 1996) and was restricted by a 145,000 ton annual quota -125,000 tons of semi-milled rice and 20,000 tons of white broken rice. In the meanwhile rice shipped via the OCT route entered Europe both levy and quota free. During these peak years the Free on Board (F.O.B.) price for Cargo Rice exported to Europe via the OCT route was in excess of US$410 per metric ton (today it is below US$300 per metric ton). As a result of over competition among millers for paddy, the price paid to farmers for a bag of paddy escalated to as high as G$2,200 per bag (today the price ranges between $1,200 and $1,600 per bag). The OCT route and the resultant high prices it generated was mainly responsible for production increasing from a low of 93,000 metric tons in 1990 to 334,500 metric tons in 1996 and exports increasing from 51 metric tons in 1990 to 262,000 metric tons by 1996. In the period prior to 1996, all rice shipped via the direct route attracted a levy of fifty per cent. Therefore, at an FOB price of US$400 per metric ton, the levy paid in Europe would have been approximately US$200 per metric ton, resulting in a price landed in Europe of US$600 per metric ton plus freight. Rice shipped via the OCT route resulted in approximately US$100 per metric ton more in cost to ship the rice to the OCT country, discharge, mill and reload the cargo into the vessel. However, when this rice arrived in Europe it attracted no levy, so the price landed in Europe was only US$500 per metric ton plus freight. This resulted in a saving of approximately US$100 per metric ton to the foreign exporter. During this time it was undoubtedly the foreign exporter and the farmer who made very large profits, while the millers were squeezed in the middle. This was largely a fault of the millers, who over competed for the farmers' paddy and caused the prices for paddy to skyrocket, which ultimately resulted in a number of millers suffering heavy financial losses. At the time when the farmers were receiving over G$2,000 per bag for paddy, they were easily making over 100% return on their investment (the cost of producing a bag of paddy, even by RPA estimates, is below G$1,000 per bag). Because of this excellent return on investment many farmers approached banks for loans to purchase machinery and equipment. Because of the farmers' ability at the time to repay these loans (based on the returns they were making) the banks ware only too willing to oblige. As a result the cultivation side of the industry is now over capitalized and because of the much reduced prices for paddy (and the resultant decrease in the farmers' profits) much of the rice farming community also find themselves in financial difficulty. These factors have caused a vicious cycle, since when millers are in financial difficulty they are unable to pay farmers promptly for paddy supplied, and the farmers are then unable to pay the banks and input (machinery, equipment, fertilizer and chemicals) suppliers, who are then in turn unable to meet their commitments and the cycle continues, hopefully not spiraling out of control. To further complicate matters, the dramatic increase in our exports, of which over 90% went to the European Union, caused some concerns among the European farmers. In Europe a large amount of rice is produced in the Southern countries mainly Italy and Spain with a little in Greece and France. The Southern European farmers objected strongly to the amount of rice that was entering the European Union from ACP countries at very low prices (because it was not attracting any levies). As a result of this in 1996 the OCT arrangement was modified by the European Union and the now famous safeguard measures were introduced, which severely limited the quantity of rice arriving in Europe by this route. This became effective on the 1st January 1997. (For an explanation of the new system in place for rice exported to the European Union please see the box captioned Guyana's Rice in the European Union). The quota for rice entering Europe via the OCT route has since been limited to 35,000 tons, while the direct route quota remains the same - 145,000 tons. The rice industry in Guyana was able to initially adjust to this situation in a relatively short space of time and has been able to access new markets in Caricom, South and Central America and Africa. This transition initially was so successful that Guyana had no problem selling any of its rice. Prior to 1996 Europe was basically our only export market and while as a group it remains our largest market, it has decreased in significance since then. For example, in 1996, 90% of our exports went to Europe via the OCT route, while only 0.5% went via the direct route and less than 10% to Caricom and other countries. However, in 1997 only 19% (down from 90%) went to Europe via the OCT route and 28% (up from 0.5%) went via the direct route. Of the remaining 53%, 31% went to Caricom, mainly Jamaica and Trinidad and 22% went to non-traditional markets such as Haiti, Colombia, Honduras and West Africa. Our new markets in South and Central America had been partly due to El Nino, which had severely affected this region significantly, reducing the rice production in these countries. However, this had given us an opportunity to enter these markets, and once we can prove (which we are in the process of doing) that we can produce good quality rice and deliver it on schedule, then we have a future in these markets. Guyana's Export Markets for Rice Guyana is extremely lucky to have two preferential markets to which it can ship its rice - the European Union and Caricom. In all the other markets that we can access we must compete openly with the rest of the rice-producing world. Rice shipped to Europe via the direct route prior to 1996 attracted a 50% levy. The levy was reduced to 35% in 1998, but this reduction was made retroactive to 1 st January, 1996. A 145,000-ton annual quota -125,000 metric tons of semi- milled rice and 20,000 metric tons of white broken rice, also restricts the quantity. Rice shipped to Europe via the OCT route now enters Europe levy free, but is presently restricted to a quota of 35,000 metric tons. All other countries exporting to Europe must pay 100% levy on rice imports, however there are some exceptions to this general rule. The 35% levy that ACP countries enjoy on rice entering Europe is for 125,000 metric tons of semi-milled rice and 20,000 metric tons of white broken rice. Imports of white rice from ACP countries would be required to pay the full 100% levy. When we expect rice to Caricom, the other preferential market that we enjoy, we benefit from not having to pay the Common External Tariff (CET) which presently stands at 20% for rice. All countries from outside Caricom should pay the 20% CET on rice entering the region. Within Caricom, our major markets are in Jamaica and Trinidad. Jamaica is our single largest market for rice, being surpassed only by the European Union as a whole. Jamaica imports mainly white rice from Guyana, with small quantities of broken rice. Our market share in Jamaica is affected by their PL480 allocation from the United States, which Jamaica uses to purchase US rice. Fortunately for us, in recent years Jamaica has seen a reduction in their PL480 allocation and has therefore been unable to import as much rice from the USA. The FOB price of rice in Guyana destined for Jamaica is usually one of the best prices that we enjoy internationally. As a result of this, most of the exporters of rice in Guyana target this market. Last year this resulted in an over-supply of rice to this market and in one crop alone we witnessed a US$40 per metric ton reduction in the price on this market. In addition, Suriname joined Caricom recently and now benefits from not having to pay the CET on rice exported to Jamaica. Last year we witnessed their entrance into the Jamaican market and this has negatively affected Guyana's market share. A concerted, coordinated marketing strategy has to be developed by Guyana's Rice Industry in order for us to continue to maintain our present share of this market. Trinidad is potentially a very large market for Guyana's parboiled rice, but we have encountered many difficulties accessing this market. The rice industry is addressing these difficulties and discussions are presently taking place at a political level in an attempt to solve them. We also export small quantities of rice to most of the other countries of Caricom, with Barbados and St. Vincent being the larger of these small markets. Since we do not enjoy any preferential status in any other region of the world we must compete with all other countries on what should be (but seldom is) a level playing field. The rest of the markets that we can realistically access are the wider Caribbean (Haiti, Dominican Republic and Cuba) and Central and South America. In these markets our largest competitor is the USA. This is severe competition, because the US have had a presence in these markets for many years and have developed a reputation for quality that is hard to beat (but that we can surely match). They also have a reputation for delivery on schedule with almost no problems in shipping. It is in this area that our rice industry as to do a great deal of work in order to compete favourably alongside the Americans. During 1997, Haiti was a significant market for Guyana's rice, importing as much as 22,000 metric tons during that year. This is a low price (compared with our preferential markets) high quality market that has traditionally been supplied by the US. We can only supply this market with rice at comparable prices to that of US rice. Unfortunately, since the severe drought as a result of El Nino during early 1998 when we witnessed an increase in our paddy prices by $400 per bag (the price today remains at this level) we cannot produce rice at a price low enough to compete favourably in this market. Fortunately (for farmers) and unfortunately (for millers and the industry), there is usually a great deal of competition for the purchase of paddy and the larger millers set prices for paddy based on the price of rice in our preferential markets of Caricom and the European Union. When this is done we cannot produce rice at a price that would allow us to favourably compete with the US and other rice producing countries in these non-preferential markets. Since we now produce more rice than can be comfortably sold in our two preferential markets we must have the ability to sell rice in our non-preferential markets. The time has come now when millers must pay a price for paddy based on an average of the price obtained for rice in both our preferential and non-preferential markets. In the recent past Guyana has marketed rice in South and Central America in the following countries - Colombia, Mexico, Ecuador, Honduras, Nicaragua and Peru. Most of these sales were successful and the rice was well received. This therefore proves that we can successfully market our rice in this region once we can be competitive price wise. Beyond 2000?? Globalization and Liberalization - two words we hear more and more everyday, two words we may not care much about, but both representing a process that will soon affect all of our lives, wherever we live - even here in Guyana. In the rice industry the new global village will result in us having to compete with the major rice super powers of the USA and South East Asia - Thailand, India, Pakistan and Vietnam. From the USA we will face excellent quality rice and a reputation for hassle-free trade with prices far lower than we presently receive in our protected markets of Caricom and the European Union. While from South East Asia we will face extremely low prices, almost half of what we presently receive for similar quality rice in Jamaica, but with a lower quality than we produce in Guyana. The reason we will be forced in the very near future to face this international competition is because we will lose our protected markets. In Europe the laws governing the trade in rice between the African, Caribbean and Pacific (ACP) and the European Union (EU) are enshrined in the Lome Convention (Lome IV). Unfortunately for the rice industry in Guyana and Suriname (the only two ACP Rice exporting countries) Lome IV comes to an end in the year 2000. The future relationship between the ACP and the EU after Lome IV is presently being negotiated. The best that we can hope for is a long transition period to enable our local rice industry time to adjust to this international competition. (For an explanation of what the industry hopes to accomplish in a successor programme to Lome IV please see the box captioned Rice in Europe after 2000.) Although we are only required to pay a 35% Levy when our rice enters the EU, while third countries (not from the EU or ACP) have to pay the full 100% Levy (with some exceptions), as the world economy becomes more liberalized we will witness the disappearance of these levies This will then mean that we will no longer have our competitive advantage over the rice superpowers in these markets. Early in the next century we will also witness the gradual (we hope very gradual) phasing out of the Common External Tariff (CET) that third countries presently have to pay when exporting rice to Caricom from outside the region. This CET for rice presently stands at 20 percent. This will remove the competitive advantage we now have in this region. "What must we do in order to survive in the 21st Century?" The most important objective we must achieve before 2005 is the lowering of our cost of production. We must be able to produce rice at a price, at least as low as that of US rice in order to compete in this part of the world- the Caribbean and South and Central America. There are many who will argue that at present the cost of production in the US is much higher than that in Guyana and the only reason why their rice can be sold for less than ours is because of the many subsidies that their farmers receive. This may be true (and I believe that it is) and since these subsidies are paid for by the American taxpayer, so it is unlikely that they will continue forever. But, we in Guyana have no influence on US Agricultural Policy, so we must plan as if the subsidies the American rice farmer receives will never end. Since the cost of paddy accounts for 70-75% of the cost of the rice produced, then in order to reduce our cost of production we must first and foremost reduce the cost of producing our paddy. Unfortunately, the organisation that should play the most important role in this area is the Rice Producers Association (RPA) and at the start of each crop all their energies are expended trying to increase the price farmers get for their paddy. While this may be a noble deed, it is only so in the very short term. This process does not encourage farmers to attempt to lower their cost of production it actually accomplishes the reverse. It is very short term, because if we are unable to lower our cost of production to below US$300 per metric ton FOB for 20-25% White Rice (the present FOB price for this quality of rice in Jamaica is US$340 to US$380 per metric ton) then the millers will be unable to sell our rice overseas and likewise the farmers will be unable to sell their paddy locally. Two other objectives that we must achieve before 2005 is to produce the best quality rice in the world and we must be able to deliver this product to the customer on schedule in a hassle-free environment. While we are well on the road to producing the best quality of rice in the world we are far, far behind our largest competitor (the US) on delivery on schedule in a hassle-free environment. Guyana produces mostly extra long grain rice in the form of the traditional Rustic variety and more recently, BR240 and F710. These varieties are among the longest rice grains produced in commercial quantities, and marketed internationally. The Rustic variety produces undoubtedly one of the best-looking White and Parboiled rice available in the world today. It is because of this high quality of rice that Guyana has been able to develop niche markets in Europe and has the potential to develop similar markets in South and Central America. It is also because of this high quality that we can even compete with the US today. While some of the larger producers have the ability to market their rice directly on the international market, most of the millers in Guyana cannot do this, because they are unable to produce large enough quantities, fast enough to fill a vessel. They, therefore must sell to international buyers, who will buy rice from many producers, consolidate a shipment and then sell this on the international market. It is with these types of shipments that we have to make our greatest improvement to ensure delivery on schedule. This must also be accomplished in a hassle-free environment where the buyer does not have to sign contracts for 3,000 tons in order to guarantee the delivery of 2,500 tons. Our final major objective must be to develop brand name recognition for our rice first as a country and then by individual companies. Today most of our rice marketed in Europe is sold as a "Product of Suriname". This is because in the good old days in Suriname a concerted effort was made to market their rice as a product of Suriname. Ironically most of our rice that has been sold in countries that traditionally imported US rice, like Haiti, was sold under such brand names as "American Gold", "Montana", etc. While this initially allows us to access these markets, every effort must be made to develop our own brands ("Guyanese Gold" or "Demerara" maybe) in these countries. It is only in this way that the final consumer, the housewife in these countries, can become aware of our product and begin to demand more and more of it - this should be our ultimate goal. The rice industry in Guyana has a great future. The world's population continues to increase and rice is the staple diet for the majority of its people. Also the area of arable land available for agriculture and the water resources available to rice cultivation continue to decline elsewhere (Guyana has tremendous land and water resources available for rice cultivation). Guyana should then be in an ideal position to capitalize on this in the future. However, in order for us to actually benefit from this in the fiercely competitive global world of the 21st century we must reduce our cost of production, ensure delivery of our superior quality rice on schedule in a hassle-free environment and develop the name recognition for our product that we can all be proud of. Guyana's rice in the European Union After the implementation of the Guyana's rice in the European Union safeguard measures at the beginning of 1997, the European Union subsequently developed a licensing system for all rice shipped to the EU from ACP countries. European importers of ACP rice are now required to apply for licenses if they want to import rice from ACP countries. The year has been divided into 3 - four month tranches for licensing purposes. These run from the 1st January to 30th April, from the 1st May to 31st August and from 1st September to 31st December. The quota for licensing purposes for each period is 44,660 metric tons. The way the system works - the European importer applies for the licenses he requires by the 5th of the first month of the licensing period. All applications are then processed within the next 20 days and by the 25th of the month the importers are notified as to what licenses they have received. What has actually been taking place is that most of the European importers apply for a much larger quantity of licenses than they actually require, to the extent that, for the licensing period January to April 1999, there was over 75% over-application for licenses above the 44,660 metric ton limit. This meant that every importer who applied received approximately 75% less than what he applied for. This process continues and by the next licensing period from May to August we are likely to see over 100% over-application for licenses. This causes severe problems with the process, since usually licenses that are not accepted by the importer and returned to the commission, are not utilized, resulting in Guyana being unable to export the full 44,660 metric ton quota. Once the European importer, usually the large European millers, accept a license they have to lodge with the commission EQ$28 for every metric ton of license granted. (EQ$28 is approximately US$30.) If the rice does not arrive in Europe by the end of the specific licensing period, the importer forfeits the US$30 that he lodged. This results in a large amount of risk to EU importers when handling ACP rice. When the European Commission established the licensing system to control ACP imports of rice, no one took into account when rice was reaped in ACP countries. Both Guyana and Suriname have similar cropping seasons with harvesting taking place from the middle of March to the beginning of June and from the middle of September to almost the beginning of December. Since the first licensing period comes to an end at the end of April, and considering the time required for a vessel to sail from Guyana to Europe and the cargo to clear customs, vessels destined to arrive in Europe before the end of April must leave Guyana by the 10th April. Because the crop starts in Essequibo in the middle of March and in the rest of the country by the end of March to early April, it is extremely difficult for Guyanese millers to access enough paddy to produce large enough quantities of rice for shipment to Europe before the end of April. This results in an unusual amount of competition between millers for paddy that is harvested early in the crop and of course this results in the prices paid during the early part of the first crop being extremely high. Because importers in Europe will then apply for new licenses by the 5th May, but not know what licenses are granted until the 25th May, there is usually a lull of purchasing activity by European buyers for export to Europe during the latter part of April, and most of the month of May. This causes a great degree of uncertainty within the market and again usually results in local millers being encouraged to accept lower prices than could be accessed, if the situation was normal. The future of Guyana's rice in Europe During early 1999 negotiations will begin for a successor programme to LOME IV which governs the trading relationship between the African, Caribbean and Pacific Nations (ACP) and the European Union (EU). The LOME arrangement specifies among other things, the quota and levy that rice from ACP countries (mainly Guyana and Suriname) attracts in the EU. In the past the quota for ACP rice to the EU stood at 125,000 metric tons of semi-milled rice and 20,000 metric tons of white broken rice when this rice was shipped via the direct route. A quota did not restrict ACP rice going through the OCT route at the time. However, at present (since Feb 1st 1991) the new quota on the OCT route is 35,000 metric tons. Prior to January 1st 1996 the levy on ACP rice entering Europe was 50%, but it has since been reduced to 35%. The local rice industry through the Caribbean Rice Association (CRA) with assistance from the Caribbean Council for Europe (CCE) is at present strongly lobbying for a "post LOME" position for ACP rice in Europe after the year 2000 that would reflect the following: Create a programme of assistance of an industry specific nature for the ACP rice industry aimed at encouraging greater efficiency and productivity in cultivation, milling and transportation. Ending completely in the year 2000 the OCT route in respect of ACP rice. (This is justified because instead of benefiting these countries, the route only benefits a few wealthy millers in the OCTs). A post 2000 quota for ACP rice shipped directly to Europe at an initial level of 250,000 metric tons for traditional ACP suppliers, increased by 20 % annually up to 2005 at which point ACP rice from traditional supplies should be able to enter the EU market completely free of any quantitative restrictions. (This is justified because since the start of the LOME Programme the quota has been at 145,000 metric tons, and although the EU has increased in size the quota has remained the same). Providing long term assistance to develop the quality of their product and an awareness in Europe of the origin of such rice so that ACP producers can prepare for eventual open competition within a globally liberalised market. Reducing further the levy on rice exported by the direct route. We believe that this position is consistent with encouraging the development of a fully competitive rice industry in Guyana, that is able to operate in global markets, free of subsidy and mainly controlled by our local private sector. We also believe that such a system would provide the EU with certainty as to the volumes and quality of rice it will receive from ACP sources, while allowing it to regulate its own market in a manner that ensures that the interest of European farmers are protected. Types of rice produced in Guyana In general, rice is produced from paddy that accounts for 70 - 75% of the cost of the final product. When only the shell is removed from the paddy the rice produced is referred to as Cargo Rice. This rice still has all the Bran layers intact. Cargo rice is mainly exported to Europe, where it has to undergo further processing before being sold. In Europe, Cargo Rice is also referred to as Brown Rice. When the bran layers are removed the rice produced is called White Rice. This type of rice is mainly exported to Jamaica and most of our non-preferential markets in South and Central America. If only a portion of the bran layer is removed then the rice produced is referred to as Semi-milled Rice. Parboiled Rice is produced by a process that involves soaking of the paddy, then steaming it under pressure after which it is thoroughly dried prior to going through the normal milling process. The result is that even when this rice is polished in the mill portions of the bran layer remain on the grain. As a result this rice is more nutritious than regular white rice. Parboiled Cargo Rice and Parboiled White Rice are the two types of parboiled rice produced, the former with only the shell removed and the latter having being polished. In Guyana, parboiled rice is usually referred to as Brown Rice. After the implementation of the Guyana's rice in the European Union safeguard measures at the beginning of 1997, the European Union subsequently developed a licensing system for all rice shipped to the EU from ACP countries. European importers of ACP rice are now required to apply for licenses if they want to import rice from ACP countries. The year has been divided into 3 - four month tranches for licensing purposes. These run from the 1st January to 30th April, from the 1st May to 31st August. and from 1st September to 31 December. The quota for licensing purposes for each period is 44,660 metric tons. The way the system works - the European importer applies for the licenses he requires by the 5th of the first month of the licensing period. All applications are then processed within the next 20 days and by the 25th of the month the importers are notified as to what licenses they have received. What has actually been taking place is that most of the European importers apply for a much larger quantity of licenses than they actually require, to the extent that, for the licensing period January to April 1999, there was over 75% over-application for licenses above the 44,660 metric ton limit. This meant that every importer who applied received approximately 75% less than what he applied for. This process continues and by the next licensing period from May to August we are likely to see over 100% over-application for licenses. This causes severe problems with the process, since usually licenses that are not accepted by the importer and returned to the commission, are not utilized, resulting in Guyana being unable to export the full 44,660 metric ton quota. Once the European importer, usually the large European millers, accept a license they have to lodge with the commission EQ$28 for every metric ton of license granted. (EQ$28 is approximately US$30.) If the rice does not arrive in Europe by the end of the specific licensing period, the importer forfeits the US$30 that he lodged. This results in a large amount of risk to EU importers when handling ACP rice. When the European Commission established the licensing system to control ACP imports of rice, no one took into account when rice was reaped in ACP countries. Both Guyana and Suriname have similar cropping seasons with harvesting taking place from the middle of March to the beginning of June and from the middle of September to almost the beginning of December. Since the first licensing period comes to end at the end of April, and considering the time required for a vessel to sail from Guyana to Europe and the cargo to clear customs, vessels destined to arrive in Europe before the end of April must leave Guyana by the 10th April. Because the crop starts in Essequibo in the middle of March and in the rest of the country by the end of March to early April, it is extremely difficult for Guyanese millers to access enough paddy to produce large enough quantities of rice for shipment to Europe before the end of April. This results in an unusual amount of competition between millers for paddy that is harvested early in the crop and of course this results in the prices paid during the early part of the first crop being extremely high. Because importers in Europe will then apply for new licenses by the 5th May, but not know what licenses are granted until the 25th May, there is usually a lull of purchasing activity by European buyers for export to Europe during the latter part of April, and most of the month of May. This causes a great degree of uncertainty within the market and again usually results in local millers being encouraged to accept lower prices than could be accessed, if the situation was normal.