Last fall, at our neighborhood supermarket, we picked up a box of rice with five different price stickers on it. Each was a few pennies higher than the one underneath. That’s not such an unusual story anymore; peeling off the tags to find yesterday’s price has become a harmless sort of entertainment for the beleaguered food shopper, giving him the same sense of chronological revelation that a geologist gets from looking at a stratified butte. The shopper is the first to know we don’t live in a world of stable prices any longer.
But too often that is all he knows. What is behind the price on the supermarket shelf—other than another price, that is? What has actually made the price go up; who is getting the extra money? Is somebody profiteering?
What is going on? That question has been asked with numbing frequency about oil, sugar, and other commodities, though with a notable lack of conclusive answers. We decided to ask it about rice—one of the leaders in the grocery store inflation—partly because nobody else seemed to want to, and partly because what happens to rice matters to Texas. (Texas is one of five states which together consume 51 per cent of U.S. rice, and it also ranked second in rice production last year.) Rice also happens to be the staple food of about one-half of the human race, and thus is the most important single foodstuff on earth. Indeed, Fortune magazine recently suggested that the interconnected inflation and shortages in basic commodities may actually have begun with the catastrophically poor world rice crop of 1972, which sharply increased the demand for other grains like wheat.
Until recently rice was one of the most stable commodities around. Throughout the 1960s, long-grain white rice (the most popular kind) sold for 20 to 22 cents on grocery store shelves; as late as 1972, a one-pound box cost only 24 cents. Then, in 1973, rice began one of those helium-balloon ascents that have become all too familiar lately. In a single two-month period, the shelf price jumped more than it had in the previous thirteen years. As the accompanying graph shows, the price rose to an all-time high of 54 cents in July 1974, then eased down grudgingly. Many consumers, moreover, think these figures from the Bureau of Labor Statistics are too low; irate witnesses told Congressional committee hearings that some East Coast stores were charging more than 80 cents per pound for rice, and boxes costing 73 cents per pound were seen on the shelves of major Texas supermarkets last summer. <insert graph 1>
Why? If inflation and shortages are simply part of the realities of living in the mid-1970s, what makes them happen? The answer, at least as far as rice is concerned, is neither glamorous nor astonishing. There is no vast conspiracy of smooth-talking businessmen (federal anti-trust investigations of rice marketing have proved singularly unfruitful); no shadowy underworld Rice King cornering the market; no burnoose-clad sheik grinning as he strangles our supply. To look behind the figures on the supermarket shelf is to be carried down into a murky, complex world of agricultural policies, international trade, and monetary shocks. We went and came back somewhat wiser, still a bit mystified, and sobered by an awareness of how disturbingly different is the economic world of 1975 from the naive certainties of a few years ago.
The basic outlines are deceptively simple. The farmer harvests his rice, dries it, and sells it to a milling company. The miller processes the “rough” rice into something edible, packages it, and, with the assistance of a broker, sells it to a wholesaler or a grocery store chain. The shelf price of the rice is thus dictated by only three factors: the farm price, the milled price, and the retailer’s markup.
There is no better way to dispel the notion that middlemen are single-handedly responsible for the rising cost of rice than to review the farm prices themselves. The accompanying graph shows the average prices American farmers have received for their rice every year since 1941; the figures illustrate just how unprecedented the recent price fluctuations really are. Despite boom years and recessions, World War and Cold War, good crops and bad, rice remained stable for nearly three decades at a farm price of four to six dollars a hundredweight. According to historians of agriculture, there was a “world shortage” of rice with “skyrocketing prices” during 1966-1968, but you would never know it by looking at the U.S: farmers’ receipts. The price fluctuations throughout the lifetimes of most Americans pale in comparison to what has happened since 1972. <insert graph 2>
The trouble began in 1971, when Thailand’s Board of Trade surveyed that year’s excellent crop and decided to unload massive quantities on the world market in order to build up their country’s foreign currency reserves. Whatever the Board of Trade decides to ask for Thai rice usually becomes the “world price,” and 1971 was no exception. The rice moved at bargain prices, bringing the desired currency into Thailand’s economy but seriously depleting their stockpile of rice.
By a malevolent twist of fate, the monsoon rains across India and Southeast Asia—vital to rice production in a region that produces 90 per cent of the world’s supply—were abnormally bad the following year, and the 1972 American crop was also poorer than usual. Worldwide rice production dropped fifteen million tons below 1971 levels, resulting in acute shortages throughout the Far East, where hundreds of millions of people depend on rice as their daily source of food. Thailand’s strategy of the preceding year had left its cupboard bare, comparatively speaking, from 2.1 million tons in 1971-72. Thailand was able to export less than a million tons in 1972-73.
Since most rice is consumed in the country where it is grown—only three per cent ever enters international trade channels at all—the drop in Thai exports had a drastic impact on world supply. On the surface it might seem that the United States would be in a good position to take up the slack—after all, the federal crop support program permits American farmers to produce three times as much rice as we consume. After every diner eats his fill of the fluffy grains, after every Rice Krispie is devoured, after a couple of big brewers (Anheuser-Busch and Coors) siphon off the broken grains to use in beer, after every rice farmer sets aside all the seed he needs for the next year’s planting, two-thirds of the crop is still left over. But in 1972 most of that extra rice, not surprisingly, was long gone.
If the government had not made some provision for disposing of our crop surpluses, the country would be awash with rice by now. (The alternative—to let free market forces bring rice production down to the level of domestic consumption—would have put hundreds of rice farmers out of business, and has never been politically possible.) Except for rare periods like the shortage of 1966-68, U.S. price supports have kept domestic rice prices so far above the “world price” that our exports could not compete: why would Indonesia buy U.S. rice at $220 a ton if it could buy comparable rice from the Thais at $140 a ton?
To make American surplus rice commercially competitive, the government paid an “export subsidy” to exporters who bought the rice at the (high) U.S. price, sold it overseas at the (low) world price, and billed the U.S. government for the difference. Foreign consumers were therefore eating American rice at cheap world prices, while American consumers were paying an artificially high domestic price on the identical rice at home; meanwhile American taxpayers were footing the subsidy bill which made the whole thing possible.
Since even the export subsidy system could dispose of only half the leftover rice, the government also devised the Food for Peace program—called the Public Law 480 concessional sales program by its friends and the “foreign giveaway” program by its critics. Under Food for Peace, the U.S. government extended easy credit to favored foreign countries so they could purchase our surplus rice. This served the convenient dual purpose of getting rid of our surplus while using it as a diplomatic weapon—“self-beneficial altruism,” as some have described it.
During 1972-73, a total of $259.4 million worth of rice was shipped overseas under P.L. 480 contracts. The eventual cost, in fact, was even higher than it first appears. Under the Cargo Preference Act, 50 per cent of that rice had to be shipped on U.S. flag vessels, whose rates are higher than foreign-flag vessels. When the rice arrived in, say, Korea, the Korean government paid the higher freight bill and was reimbursed by the U.S. government for the excess over foreign-flag rates. During 1972-73, this “ocean freight differential” amounted to another $12.3 million.
As a result of this elaborate export system, U.S. rice moved efficiently out of the country. Since there was always a big surplus, the exports did not cause any domestic shortages; and since the retail price was both low and stable for many years, the consumer did not know or particularly care that he was paying more for U.S. rice than it was “worth” at world prices.
Thus, when the Thais unloaded their rice at bargain prices in 1971-72, costlier U.S. rice did not pile up, unwanted, in Houston warehouses. Our export subsidies simply rose, keeping our rice competitive. During most of 1969 and 1970, the federal government had paid exporters about a dollar for every hundred-pound bag they sold abroad; by March 1972, in the frantic push to keep up with the Thais, U.S. rice stocks were being pushed out of the country with the aid of $2.75-per-bag subsidies. Any extra reserves that the U.S. might have built up were depleted in that great competitive sell-off. When the shortage hit in late 1972 and 1973, the U.S. had smaller reserves of rice than the year before.
Consequently, there was no buffer to shield the American domestic market—always tiny compared to American exports—from the growing desperation of foreign governments whose populations needed rice, any rice, to survive. A swelling volume of American rice flowed overseas in the form of commercial dollar exports: 16 million hundredweight in 1971-72; 25 million in 1972-73; 37 million in 1973-74.
Export subsidies were discontinued in December 1972 as world prices rose to domestic levels, but demand was unabated. When representatives of the major rice milling companies (Uncle Ben’s, Blue Ribbon, Comet, Riviana) assembled in countless American rice-growing towns for their weekly bidding on the 1973 crop, they did so with the knowledge that the export value of that rice was rising by the hour. Whatever rice they bought, even if they intended to sell it in this country, was affected by the going world rate. The farmers, no fools, could look at how the prices of milled rice exports were rising and force the millers to ante up accordingly. Rice farmers, after all, have one kind of economic leverage that cattlemen and citrus farmers do not have: a much less perishable crop that can be held off the market while prices rise—for three or four years, in fact, if the farmer has the inclination and resources to wait things out.
The figures in the following table were the sort of thing the rice farmers noticed: a sharp, ultimately spectacular increase in the average prices of milled, long-grain U.S. No. 2 rice, f.o.b. Houston: <insert graph 3>
The milled price quotations are the point where foreign demand is translated into an economic influence on domestic markets; that price is eventually reflected back to the farmers when the miller bids to replenish his inventory, and forward to the consumer, who must pay a shelf price that reflects his grocer’s higher cost. (To be sure, these particular milled rice prices are not susceptible to direct correlation with supermarket prices; supermarkets don’t ordinarily sell in hundred-pound burlap bags. But the major grocery chains which market rice under their own house labels purchase it in bulk at these milled prices, and the millers do essentially the same thing for their brand-name products—dividing the cost of a hundred pounds of bulk rice by a hundred and then adding the cost to them of packaging the one-pound boxes. So for practical purposes, the prices for bulk milled rice also indicate the prices for packaged milled rice destined for American consumers.)
Weather-induced shortages were not the only factor which pushed rice prices up in 1972-73. The net effect of two dollar devaluations in the early Seventies was to make American goods seventeen per cent cheaper on world markets. U.S. rice became a more attractive buy overseas. Even more important, international purchasing patterns began to shift, and the good world crops of 1973 and 1974 did not bring prices down as quickly as might have been expected.
In 1973-74 Saudi Arabia purchased 60 per cent more U.S. rice on the commercial market than they had done the previous year. William Lane, the president of Houston’s Riviana Foods, Inc. (the nation’s largest exporter of packaged rice) says that purchases from OPEC nations have risen to such unprecedented levels that “rice should become a significant factor in the recycling of petrodollars.” In the first six months of 1974, Iran purchased 250,000 tons of top-quality U.S. rice—none of that mediocre No. 5 P.L. 480 stuff. Some of it goes to civilian consumers, some to the Iranian Army, and some is unaccounted for. Says a vice-president of a major U.S. milling company: “We don’t have any idea what they’re doing with it—whether they’re storing it or giving it to their friends.”
A considerable share of Texas rice exports are handled through a state farmers’ cooperative called American Rice Inc., headquartered in a small brick building near the Hempstead Highway in Houston. Our conversation with its president, Ralph Newman, was interrupted every so often by telephoned negotiations on a pending rice deal with Korea. By the end of the visit, Newman—thirtyish, clean-cut, dressed in brown jeans, a western shirt, and a tan Lee jacket—had sold 22,000 metric tons of brown rice for $8.6 million to the opposite side of the world. “That’s almost as much as the whole state of Texas eats in a year,” he observed dryly.
Newman thinks speculators made an already-tight rice situation worse during the past couple of years. “A great deal of rice was bought speculatively on the ‘greater fool’ theory—you know, ‘No matter what the price today, I can find a greater fool to buy it from me tomorrow.’ I can’t point to some Rice King or anything like that. I just know in general that when we began to process this year’s crop, there was an awful lot of rice around the world left over from the previous year.”
Some countries, like Indonesia, are stockpiling rice to guard against future famine. Others seem to think that if they increase their reserves, they will be able to bargain for a lower price if severe shortages return: they will not have to choose quite so soon between hunger and the “going rate.” What about the persistent rumors that the Arab oil-producing countries are stockpiling a year’s food supply, or more, to protect themselves against a food embargo if the Middle East situation turns sour?
“Our dollars have no value unless you spend them,” Newman says. “I know the OPEC countries bought lots of food, and they physically moved it over there.” What are they doing with it? He shrugs. “Some people’s thing is gold; other people’s thing seems to be food. In a sense rice went from X to Y for the same reason gold went from A to B. Rice stores well, you know.”
One final factor affecting milled rice prices has been given increasingly close scrutiny lately: the Food for Peace program, P.L. 480. A single exporter, the New Jersey-based Connell Rice & Sugar Co., has historically dominated rice shipments under this enormous program. During 1973-74, at a time of astronomical domestic prices, P.L. 480 shipments to Vietnam and Cambodia constituted one-third of total U.S. exports, and one-fifth of the entire consumption of U.S. rice. The quality of most of this rice was too low for the domestic market, but some of it could have been in an Uncle Ben’s box on your neighborhood grocery shelf if it hadn’t been siphoned off by P.L. 480. Contracts are awarded by an interagency committee involving several branches of the federal government. U.S. Department of Agriculture officials have wondered out loud at Connell’s domination of this lucrative field; competing exporters who are perfectly capable of handling the business seldom even bother to bid for P.L. 480 contracts against Connell.
The three-man Food and Agriculture Division of the U.S. Department of Justice took a hard look at Connell last year, but came up with nothing. Sinclair Gearing, its head, says he and his fellow lawyers “could not conclude there was an identifiable anti-competitive practice involved. All we could find was, they beat everybody else out.”
In January of this year, however, the Washington Post brought to light a current USDA probe of Connell. The investigation centers around a commercial contract dated August 3, 1973, between Connell and the Indonesian government for the purchase of 110,000 tons of low-grade No. 5 rice at a sale price of $420 a ton—a figure ten per cent higher than any previous monthly average price for high-quality No. 2 rice, not to mention No. 5. When the contract became known, “it lit a fire under the rice market,” according to one commodity broker. Within a month, export prices for No. 2 rice hit $659 a ton, and by November they were up to $760. The boom was on in earnest.
But oddly enough, Connell shipped only 28,000 of the 110,000 tons to Indonesia during 1973. Instead, to the chagrin of the Indonesian government, Connell shipped massive quantities of rice to Viet Nam and Cambodia under P.L. 480 Food for Peace contracts acquired during the price boom which, some say, Connell’s Indonesian deal helped precipitate. These contracts carried price tags of as much as $614 a ton, paid for, of course, by U.S. government credits. By delivering under the P.L. 480 contract instead of the Indonesian contract when prices were high, Connell apparently boosted its profits substantially. Connell did not finish its deliveries to Indonesia until December 1974, when export prices had dipped back down to the area of their $420-per-ton contract.
American consumers were paying 28 cents per pound for rice when the Connell-Indonesia contract was signed. Four months later they were paying 49 cents a pound.
To date, the USDA has neither found nor alleged any wrongdoing by Connell, and the company’s president was quoted by the Post as saying that “in every respect… we did the right thing.”
Whatever the eventual outcome of the USDA investigation, columnist Jack Anderson has noted one ironic footnote to the “Food for Peace” shipments to Southeast Asia.
When the rice arrived, ostensibly for humanitarian distribution, the Viet Nam and Cambodian governments sold it at the marketplace to generate currency. That extra money freed an equal portion of their domestic budgets for the purchase of military hardware—making the program, ultimately, “Food for War.”
Historically, the farmer’s share of the retail price of rice has been about one-third; it was 34 per cent in the first quarter of 1967, 34 per cent in the third quarter of 1972, and never dropped below 30 or rose above 35 during the intervening period. The boom in prices at the farm level changed all that. By the final quarter of 1972 the farmer’s share was 44 per cent, and by the last half of 1973 it had risen to an astonishing 54 per cent.
These figures confirm the obvious: that U.S. rice farmers did extraordinarily well during the period when rice prices were most highly inflated. In early 1972, when rice was retailing for 24 cents a pound, the farmer was effectively getting one-third of that value, or about 8 cents; in late 1973, he was getting about 24 cents, or more than one-half of the much higher shelf price of 45 to 48 cents. Farm costs increased, of course, but not by anything like that much.
Significantly, however, the farmer’s share has begun to drop precipitously. By the fourth quarter of last year, it had sunk to 31 per cent, or 17 cents of a still-high retail price of 53 cents. In effect, then, the farmer was back down to his usual percentage (albeit of a higher total price), and the remaining 69 per cent was being divided by those who followed him in the chain of distribution—principally the miller and the supermarket.
USDA economists have a name for the gap between the retail price of a food and its net farm value: the “farm-retail spread.” The following table shows the fluctuations in the farm-retail spread of long-grain rice since 1967: <insert graph 4>
Not only have the middlemen recaptured their normal two-thirds share of the retail price, but also the actual dollars-and-cents value of that share has increased 174 per cent in only one year. Inflated costs have hit millers and supermarkets just like everyone else, of course; but do costs alone account for an increase in marketing margins on that scale?
The USDA calls the increases “extraordinarily large” and says they are due “in part” to pent-up cost pressures incurred during the period of wage-price controls, when labor costs, fuel prices, and other expenses increased faster than the farm-retail spread. Since price ceilings were removed in the summer of 1973, says the USDA, “such pent-up cost increases have apparently been passed through the system by food marketing firms attempting to re-establish normal markups and improve relatively low earnings of the control period.” That is a polite way of saying that even when costs go down, consumer prices may not.
There is no question that supermarket profits dipped during wage-price controls, though there is zesty debate over whether profits were too high even then. And the cost increases since the summer of 1973 have been painful, too: energy—up 52 per cent over the previous year; hourly wages—up 10 per cent; packaging—up 30 per cent (reflecting, says the USDA bluntly, “higher costs of basic raw materials… and higher profits of packaging manufacturers”). Some dollar-increases, moreover, are built into the system: the broker who gets the rice to the supermarket is customarily paid four per cent by the miller, who includes that expense as part of his own price. Four per cent of $33 is a considerably bigger bite than four per cent of $10; the broker’s fee goes up—only the amount of work he does stays the same. A budgeting official of a major milling company says, “We went along here for fifteen years projecting all our costs on the basis of a general inflationary factor of three to four per cent a year. But things have gone up so much, so unpredictably in the last couple of years, we can’t use a general index any more. We have to figure each one out separately—usually by the week.” Economically, it’s a new world.
How much of the middleman’s share does the miller get, and how much does the supermarket get? The only official figures on that subject are not particularly helpful: in 1972, when a box of rice cost 24 cents, the miller got 10.6 cents and the grocer got 4.1 cents; in 1973, when rice cost 30.8 cents, the miller got 9.2 cents and the retailer got 4.7 cents. Figures for 1974, which might be more intriguing, are not yet available. But the earlier figures do show a trend for the non-farm share: the miller, down; and the retailer, up. From all available indications, the retailer and not the miller has been the big winner in the past year or so.
A comparison of milled rice prices against retail prices yields some interesting results, and may buttress some popular suspicions about the way supermarkets handle price fluctuations. From August 1973 to November 1973 milled rice prices rose rapidly. Then they leveled off for several months before beginning a decline in the summer of 1974. By August 1974 they had dropped back down approximately to the level of August 1973.
How did the supermarkets respond to these cost increases and decreases? On the way up, the supermarkets adjusted their shelf prices quickly to pass along the higher costs: shelf prices rose from 28 cents in August to 46 cents in November, climbing still higher (to 54 cents) by early summer, 1974. But when the millers’ prices began to drop and the supermarkets found themselves paying less for their rice, they dragged their feet on corresponding retail price cuts. In August 1974, the supermarkets were paying the miller about what they had paid a year before, but their shelf prices were extravagantly higher (53 cents versus 28 cents). Even as late as December 1974, when mill prices had remained at or below August 1974 levels for three consecutive months, the retail price was still 48 cents.
The thousands of Whoevers that determine the mark-ups at U.S. supermarkets apparently watched the mill prices with a hawk-eye when they went up in 1973, but somehow became distracted when they went down in 1974.
“Sometimes a downward movement in price doesn’t get the attention an upward one gets,” says a major Texas broker who is in a position to observe supermarket behavior at close range. He tacitly acknowledges that the stores often charge whatever they can get away with, frequently exceeding the miller’s recommended mark-up for his product. “Stores are highly competitive,” he says, “but the competition takes place on conspicuous products. It’s all a matter of sensitivity.”
Sensitivity? In the jargon of the trade, it seems, a “sensitive” product is one whose price shoppers notice—the sort of thing that shows up in grocery store sale ads, like hamburger or detergent or TV dinners. There are items on which supermarkets lose money month after month, sale or no sale, because cost-conscious customers watch their prices and resist increases which are rationally dictated by rising wholesale costs. The lost profit (or more) is made up by charging higher prices for less sensitive items like luxury foods and things that most people buy infrequently—such as rice.
In the current economy, stores which attempt to attract customers by limiting their own freedom to juggle prices this way have found themselves in trouble. Texas shoppers may recall a so-called “price freeze” on 1100 “basic” grocery items announced by the Kroger chain back in December. The self-imposed freeze was to last at least two months. Come February 1, the chain’s marketing director said the program would end immediately and some prices would be increased that very day because “our mark-up was substantially reduced the last two months” and too much potential profit had been lost.
After Ralph Newman finished the phone call that clinched his Korean deal, we asked where he thought the price of rice would be five years from now.
“In today’s economy I would make utterly no projection,” he said. “I wouldn’t have any idea.” Whatever happens, the American consumer will certainly have very little to do with it. Domestic consumption is so small in comparison with exports that even if consumers boycotted rice with a vengeance—something they show no inclination to do—the shelf price would not change much. World demand is the force that makes the wheels of rice production turn.
Americans have grown accustomed to thinking of themselves as the world’s Top Dog, the people with more money than anybody else, the people who eventually get whatever they want by outbidding everyone else. It ain’t necessarily so.