The Israeli Question and the Price of Rice in Asia

Rice importer Doron Frankenstein explains why Australia's drought and Indian elections affect prices here.

A few times a week Indian government inspectors conduct surprise inspections at the country's six ports from which rice can be exported. They go over the export registries to make sure that the rice being sent abroad is sold at the government-set price of $1,200 per ton. They open up the cargo containers, removing and opening a sack randomly to make sure the rice matches the type printed on the bag: Basmati rice is authorized for export; cheaper varieties are not.

The inspectors even cook some of the samples, since that's the only way to truly test the exact variety of the grain. In Basmati, the ends of the grain expand in cooking, while ordinary rice keeps its original shape. Anyone caught cheating is hustled immediately into court and kept in custody until his fate is determined. The financial risk is so high that exporters are deterred from putting one over on the government.

Until about six months ago, before the start of the international rice crisis, rice could be exported from 22 ports in India. After exports were restricted to the Basmati variety only, the authorities limited the number of ports to six to make the supervisory process easier.

The government's main concern is the possibility of price hikes in the local market, which could set off riots - something that is definitely not desirable in the long run-up to the elections scheduled for 2009.

For the past 18 months, Doron Frankenstein has been in charge of rice at the factory in India of his company, Choice Israel Marketing. There are about 2,000 varieties of rice in all, but the only one that interests him is the relatively expensive Basmati. Indians eat mainly the cheaper varieties of short-grain rice, known in Israel as round or Persian rice. That is why the Indian authorities are still permitting exports of Basmati.

"We make rice," Frankenstein says. "We have a production line that is about 100 kilometers south of Mumbai. We thresh, clean and dry the rice, and then grade and pack it. All the big companies in Israel export rice loose and then pack it in Israel. We are unique in that we pack it in India. It's a lot more efficient because labor is cheaper and it gives us a relative advantage.

"In addition, we are in full control of product quality before the final packing stage. With loose rice, if the quality is not good it is not accepted practice to return the rice to the sender, and the companies are forced to throw it out. With me, if a truck pulls up to the factory in India with substandard rice, I send it right back," Frankenstein says.

Choice Israel Marketing imports rice for a few Israeli marketing chains under a private brand name, but confidentiality agreements prevent Frankenstein from naming them.

Last week Frankenstein and his fellow rice exporters in India were surprised by the government's decision to levy a tax of $200 per ton on exports of Basmati rice. The assumption is that the taxes will be used to subsidize the predicted increase in local rice prices. The exporters are trying to use their influence to reduce the tax drastically, but observers believe the government is unlikely to change the export restrictions significantly until after the elections next year, barring unforeseen changes in the international rice market.

Frankenstein believes the taxes imposed in India on rice exports will start to be felt in Israel soon, leading to a further increase of about 30% in the price of Basmati - on top of the latest price hikes of about 60% on average. The fact that Thailand just announced its suspension of rice exports will contribute to the upward spiral. India and Israel are responsible for 50% and 30% of Israel's rice imports, respectively.

"The price hikes are genuine and are not due to speculation on the part of international traders," Frankenstein says. He says the main reason for the world crisis is the drought in Australia and Bangladesh. The increase in the standard of living in India and China also play a part in the crisis, as local consumption has risen at the expense of exports.

Developments in the Philippines also play a role. The country consumes a lot of rice but is a relatively small producer. When Manila asked the World Bank to erase some of the country's debts so that it could buy rice, "it created a terrific buzz," Frankenstein says. "The free market and the players in it are traders. When a country makes purchases, there is a sense that it is starting to hoard, so the others say, 'maybe it knows something that we don't know.'"