The surprise move to fix the kyat rate has hurt the competitiveness of Myanmar’s rice exports, traders say, and overseas orders are already starting to decline.
Rice traders are warning that the regime’s recent move to peg the exchange rate could cripple exports, with potentially big effects on the country’s farmers. The sector was showing strong signs of recovery after a turbulent 2021, but farmers now fear export sales may dry up again.
The effects of the February 2021 coup were felt quickly by farmers and exporters, with banks and ports closed and transport affected. Rice exports fell in FY 2020-21 from 2.6 million tons to 1.8 million tons.
As revealed in a recent report, the rice value chain has shown “resilience” despite numerous shocks from Myanmar’s political crisis and COVID-19, and has responded to domestic and international market demand. .
In January, rice exports (including broken rice) reached 260,000 tonnes, according to the Myanmar Rice Federation – the highest monthly total since before the coup.
On March 25, the U.S. government’s Foreign Agricultural Service office in Yangon forecast that rice exports would “remain strong” due to high world prices and strong demand from buyers, including African and European countries, from China and the Philippines.
But on April 3, the junta-controlled Central Bank of Myanmar shocked the business community by introducing foreign currency controls and fixing the exchange rate at 1,850K to the US dollar – below the rate of the market of 2,000 K for a dollar.
Contracts are drying up
According to the rules, foreign currency earnings must be converted into kyats within one day at the stipulated rate. Using the new exchange rate, traders had to revise upwards the US dollar price of Myanmar rice they offered to foreign buyers.
Traders say this artificial strengthening of the kyat has made exports less competitive at a time when they were already struggling with rising domestic prices due to lower production and rising shipping costs.
“Because our export price is now high, demand from overseas buyers is down,” said Ko Yazar Myo, secretary of the Myanmar Rice Miller Association. “It started when the US dollar exchange rate was suddenly changed to 1,850K. Domestic rice prices also increased, so these two factors are driving up the export price and we are no longer competitive. . »
He cited the example of 5 percent broken rice, which Pakistani exporters sell for $350 per metric ton. Myanmar exporters are offering between $370 and $380 a ton, on virtually non-existent profit margins, up from $330 to $335 a ton at the start of this year.
Depending on the variety, the “free on board” or export price of rice from Myanmar can now reach $500 a tonne, traders said.
“Rice exports are still ongoing at the moment as we have advanced orders for delivery in May and June. We have to fulfill these orders regardless of the price,” Yaza Myo said.
Dr. Soe Htun, vice president of the Myanmar Rice Federation, said he expected rice exports to decline this year due to the revaluation of the exchange rate.
“Now the only rice exports are for advance purchase contracts,” he said. “Because the exchange rate has been fixed at 1,850K, it is difficult to sell our rice, so no new export contracts are made. We can hardly expect the local price to fall either because the price of agricultural inputs that farmers use is also rising, so I expect rice exports to fall.
Sai Kyaw, a rice exporter based in Mandalay, confirmed that Myanmar’s rice exports were struggling to maintain competitiveness due to rising domestic prices and new foreign exchange rules.
But he said another factor was that Burmese exporters faced higher shipping costs than some of their competitors.
“It costs us $1,800 to rent a container for rice exports, which is much higher than in other countries – in Thailand, for example, it’s only $700,” Sai Kyaw said.
There were already some warning signs for rice exports – and production more broadly – ahead of the Central Bank’s April 3 announcement on exchange controls. After peaking at 260,000 tonnes in January, exports fell to 210,000 tonnes in February and then to just 130,000 tonnes in March, due to higher local prices and reduced supply, said traders. Frontier.
The rice is produced from paddy, which trades between K700,000 and K1 million per 100 baskets (one basket equals 46 pounds or 20.87 kilograms), depending on the variety. This went from 500,000K to 900,000K this time last year.
Farmers and industry experts say the higher paddy prices are mainly due to lower production during the recent summer paddy season.
Production is down because the sharp decline in the value of the kyat since the coup has made imported agricultural inputs, including fertilizers, more expensive, while credit has also become harder to access. As a result, many farmers have responded by cultivating fewer acres, reducing fertilizer use, or both.
Meanwhile, Yaza Myo of the millers’ association said frequent power cuts meant mills were unable to operate at full capacity, which also reduced the supply of rice to the market.
So far, rice prices have increased only modestly: depending on the variety, the staple sells for K30,000-80,000 per bag (one bag contains 24 pyi, or about 50 kg), or an increase of around 2,000 to 4K more per bag based on end of 2021 prices.
The World Food Programme’s market price update for March found that prices had risen by an average of 14% year-on-year, but the increase was somewhat skewed by significant increases in some conflict-affected areas, such as Kayah and Chin states.
Most states and regions saw a significant rise in March, including Yangon, where prices rose 9%, according to the report.
Daw Hlaing, a rice merchant from Pyinmana township in the capital Nay Pyi Taw, said many customers are opting for cheaper varieties of rice.
But exporters don’t have that luxury, Yaza Myo said. They have contracts to keep and they have to buy the variety stipulated in the contract, whatever the price.
“Before, I could buy 750 or 1,000 tons with a day’s notice, but now it’s more difficult because there is less rice available,” he said. “Exporters have to pay attractive prices to get the amount of rice they need.”
Farmers in difficulty
Higher paddy prices would normally be good news for farmers, but this year they have little to cheer about. Higher production costs mean they make less profit than in previous years.
U Ko Ko Naing, who farms 15 acres in Patheingyi township of the Mandalay region, said cultivation costs have risen from around K300,000 per acre last year to around K400,000 this year.
A bag of chemical fertilizer that cost K60,000 last year has risen to almost K100,000, while the cost of hiring a harvester and thresher has risen from K50,000 to K75,000 , due to rising fuel prices.
With cultivation costs so high, Ko Ko Naing said that with an average yield of around 70 baskets per acre, the price of paddy must be around K800,000 for 100 baskets for them to make a small profit. .
“So although the price of paddy is good this year, farmers won’t get much money from it,” said Ko Ko Naing, who is also a local rice trader.
Because farmers often take out loans to pay for cultivation costs, they also usually have to sell their paddy immediately after harvest, when prices are lowest.
“Only big farmers are able to store paddy and sell it later. Most farmers have to sell their paddy immediately to pay off their debts,” said U Myint Wai, who farms nearly 100 acres in Maubin township, Ayeyarwady region. “Now there are buyers but the farmers have nothing to sell.”
Most farmers have now brought in their summer paddy and are preparing to cultivate the monsoon crop, which is harvested towards the end of the year.
However, there might be more pain ahead for them. Rice exports have become an important feature of the market since the 2011 transition and have generally helped push up prices.
If export demand dries up due to the exchange rate and other factors, this will put downward pressure on domestic rice prices – but farmers’ costs of cultivation are expected to remain relatively high.
“The rice industry is only in good shape if the whole supply chain is in good shape,” said Yazar Myo.
Sai Kyaw agreed.
“Farmers will not make a profit if paddy prices are low, especially when their input costs are high. But exporters face problems when paddy prices and shipping costs are high as they have to compete with other countries. Either way, it’s not a good situation.