ASSESSING IMPACTS OF THE WORLD ENERGY PRICE CRISIS ON VIETNAM RICE PRICE

VIETNAM NATIONAL UNIVERSITY, HA NOI UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY OF INTERNATIONAL ECONOMICS AND BUSINESS THESIS ASSESSING IMPACTS OF THE WORLD ENERGY PRICE CRISIS ON V

VIETNAM NATIONAL UNIVERSITY, HA NOI UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY OF INTERNATIONAL ECONOMICS AND BUSINESS

THESIS

ASSESSING IMPACTS OF THE WORLD ENERGY PRICE

CRISIS ON VIETNAM RICE PRICE

Instructor: M.Econ Tran Viet Dung

Student: Nguyen Thi Nhung Anh Class: QH-2010E-CLC

Faculty of International Economics and Business

Hà Nội, 10/2014

ABBREVIATIONS I LIST OF TABLES II LIST OF FIGURES III ACKNOWLEDGEMENT IV

CHAPTER 1 INTRODUCTION 1

1.1 Research objectives 3

1.2 Research questions 3

1.3 Research scope 3

1.4 Methodology 4

CHAPTER 2 LITERATURE REVIEW 5

CHAPTER 3 DATA AND METHODOLOGY 15

3.1 Data 15

3.2 Methodology : Engle-Granger cointegration test 20

CHAPTER 4 RESULTS AND DISCUSSIONS 23

CHAPTER 5 CONCLUSION 30

CHAPTER 6 LIMITATION 33

REFERENCES 34

APPENDIX 1 36

APPENDIX 2 38

APPENDIX 3 40

ABBREVIATIONS

LIST OF TABLES

LIST OF FIGURES

Figure 3.1 World crude oil spot price in the period of 1989-2014

December , 2012

Besides, I wish to extend my gratitude to my friends, especially the class QH-2010E-CLC having contributed many useful ideas for me I also would like

to deeply thank to my parents because they always encourage me and give me motivation in process of doing this thesis

Due to the limited knowledge, my thesis might have mistakes and shortcomings Therefore, I am looking forward to getting enthusiastic comments and contributions of all teachers and students

Hanoi , November 2014 Nguyen Thi Nhung Anh

CHAPTER 1 INTRODUCTION

Scarcity of energy makes developed countries navigate towards biofuels whose inputs are agricultural products, which have caused serious food shortages In addition, there are other factors such as rapid population growth pushing up food prices, climate change, and poor countries are the place suffered the most severe consequences

Food has never been a touchy issue like today According to Food and Agriculture Organization (FAO), food prices are likely to cause a new food crisis Only in May 7, 2012, global food prices have increased by 6% Harsh weather has negatively affected crop cereals, soybeans and wheat in many areas

of the United States, Russia, Ukraine, Kazakhstan In the Balkans, unprecedented drought resulted in damage estimated at over one billion euros for the agricultural sector in this one of the poorest regions in Europe Although food prices are still well below the peaks of the February, 2011 and the situation is not serious enough to cause a global crisis in the short term, the trend

of escalating food prices are concerning In high-income countries such as the USA and Western Europe, rising food prices suddenly creates many challenges, forcing families to make difficult choices in spending In low-income countries, rising food prices caused enormous difficulties, forcing people to make survival decisions

Roots of currently unstable food situation have originated since thirty years ago, when investment in agriculture began to decline In 1979, financial support for agriculture accounted for 18% of total support But by 2008, this figure was only 4.3% In developing countries, government investment in this

sector also declined over this period, with the level of reduction is one third in African countries and about two thirds in Asia and Latin America In many developing countries, especially low-income countries, downturn investment is even associated with loopholes in government policy

When food prices soared in the period from September, 2006 to June,

2008, it is obviously proclaimed that the world is coping up with a new instability Moreover, the fact that world's population is forecasted to reach 9.1 billion in 2050, severe impacts from climate change are negative factors leading

to a large scale food crisis

According to the warns of FAO leader, JG Da Sin-va, food prices will escalate and volatile in the next 10 years Mr Da Sin-va offers countries to stop taking food crops (such as corn) for fuel production and reckons that this problem can be avoided in the future, as more advanced biofuel technology will

be applicated along with the increasing use of non-food crops

However, only the coordination between non-governmental organizations, state enterprises brings about the effects for ensuring global food security At the APEC Summit in Russia in August, 2012, the governments issued a series of measures to ensure food security for their citizens According to that, there are three missions needed to be solved as quickly as possible First, the world should remove the use of unsustainable biofuels Second, it is in need to increase investment in the Africa and Latin America regions Third, the government of developing countries need to establish long-term partnerships with the private sector, international donors to stimulate investment in commercial agriculture With these measures, the governments hope that food shortages will soon be resolved thoroughly Global food security can be hold

Facing to the global energy and food crisis, a country depending on agriculture and oil imports like Vietnam is also more or less affected This paper aims to answer the following questions: (1) Is there a long-term relationship between the world energy price and the rice price in Vietnam ? (2) How does Vietnam rice market react to shocks in energy prices ? (3) Do the temporary shocks in Vietnam rice market cause long-term impacts on the price of rice?

In the condition of not understanding the dynamic adjustment process on Vietnam's rice market prior to energy prices and other external shocks, answering to these questions becomes necessary, helping evaluating and building such effective and reasonable policies related to rice

1.1 Research objectives

The study aims to analyze whether the world energy crisis put Vietnam rice price under any pressure in short or long term It also gives some proposals and solutions for Vietnam's rice exports prior to fluctuations in world energy prices

1.2 Research questions

The following questions will be answered :

rice price in Vietnam ?

1.3 Research scope

The paper examines the world energy crisis in the stage from 1989 to

2014, considers the situation of Vietnam rice price during this period, then uses

the Engle-Granger cointegration test to draw conclusions of whether the world

energy crisis has any impacts on Vietnam's rice market or not

1.4 Methodology

The study uses the quantitative research method, with the content of Engle-Granger cointegration test This model consists of three smaller models as following :

εt

relationship or not

CHAPTER 2 LITERATURE REVIEW

There are a mountain of papers discussing the issue of how the world oil crisis affects food prices The similar points of these papers are that they indicated two main effects of the oil price crisis on food prices First, an increase

in oil prices pushes up the cost of food production and transportation Second, escalating oil prices led to a shift towards biofuels, making the countries gradually reduce the cultivated areas to plant oilseeds Then, the authors offer suggestions and solutions for the governments to effectively convert the cultivated area as well as policies for sustainable agricultural development The studies below is the typical ones :

Ronald Trostle ( 2008 ) analyzes factors contributing to higher food prices and forecasts further developments of world food production World market prices for major food commodities such as grains and vegetable oils have risen sharply to historic highs of more than 60 percent above levels just 2 years ago Many factors have contributed to the run up in food commodity prices Recent factors that have further tightened world markets include increased global demand for biofuels feedstocks and adverse weather conditions

in 2006 and 2007 in some major grain and oilseed producing areas Other factors that have added to global food commodity price inflation include the declining value of the U.S dollar, rising energy prices, increasing agricultural costs of production, growing foreign exchange holdings by major food importing countries, and policies adopted recently by some exporting and importing countries to mitigate their own food price inflation On the supply side, largely due to rising energy prices, production costs for most of the world’s farmers

were increasing If petroleum prices continue to rise, costs of agricultural production will rise, as will the cost of processing, and the cost of transporting products to markets both within a country and exporting to other countries However, the author point out that most feedstocks used to produce biofuels come from annual crop production Perennial crops, such as oil palm and coconut, as well as previously used vegetable oils and fats, that are feedstocks for biodiesel are the primary exceptions Use of crops for biofuel may divert some cropland away from producing crops used for food, feed, and non-biofuel industrial uses However, in some cases, coproducts such as distiller’s grains (a byproduct when producing ethanol from corn) or soybean meal (a joint product

in producing soybean oil from soybeans), continue to be available for food or feed use when biofuels are produced Also, because global total area harvested is rising, increases in land used to produce biofuel feedstocks have not led to equivalent declines in area planted to traditional food and nonfood uses Therefore, increasing demand for biofuels just contributes to higher food prices but does not have impact in food supply In conclusion, the study shows that energy prices just have impacts on food price in production and supply side

Jannie de Villiers ( 2008 ) also wrote an article about that issue The increase in fossil fuel prices has urged the world to reconsider alternative sources

to produce energy The biofuel industry erupts on the back of increased oil prices The consequence of this development increases the demand for grains and oil seeds substantially over a short period of time followed by all time high prices.The pressure to supply more inputs has consequently increased the prices

of those products substantially with the consequential increase in the cost producing food This in itself will again worsen the food security issue regarding

affordability The article charts out one solution to the current situation which is the responsible application of biotechnology The availability of biotechnology for maize and soya beans used for animal feed and industrial usage could speed

up production to catch up with the growing demand In a macroscopic way, quick reaction should be launched by governments to create a policy environment to attract new investments in agriculture to ensure food security Reliable structures, free from corruption, should also be developed to directly address the needs of the poor during the lag time that agriculture needs to react

to this new challenge

Aditya Chakrabortty ( 2008 ) states that biofuel is the main reason for rising food commodity prices It maps out that biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil Rising food prices have pushed 100m people worldwide below the poverty line, estimates the World Bank, and have sparked riots from Bangladesh to Egypt Government ministers here have described higher food and fuel prices as "the first real economic crisis of globalisation" It

is obviously illustrated that production of biofuels has distorted food markets in three main ways First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel Second, farmers have been

encouraged to set land aside for biofuel production Third, it has sparked financial speculation in grains, driving prices up higher

Anuradha Mittal ( Executive Director of the Oakland Institute ) ( 2009) examines the 2008 global food price crisis, identifying long- and short-term causes as well as the two factors which distinguish the 2008 food price increases from earlier episodes –speculation and diversion of food crops to biofuels The paper contends that while most attention has been focused on factors including higher energy costs, decline in growth of agricultural production and increased demand from emerging economies, it is essential to examine the structural causes of growing food insecurity to understand what is really behind the food price crisis The paper points out that, according to the USDA’s cost-of-production surveys and forecasts, doubling of prices of energy intensive components of production, including fertilizer and fuel, increased production costs for the United States corn, soybeans, and wheat by around 21.7 per cent between 2002 and 2007 (Mitchell, 2008) This rise in the cost of production increased the export prices of the major United States food commodities by about 15–20 per cent between 2002 and 2007 (Mitchell, 2008) In a general way, the prices of energy have direct impacts on the prices of food, because an increase in energy prices will lead to an increase in food cost production However, the pressure that an increase in energy prices put on food price crisis is just occurring on the surface The impacts of several factors including systemic decline in investment in agricultural productivity; state’s reduced regulatory role

in agricultural production and trade; indiscriminate opening of agricultural markets which has resulted in import surges, and emphasis on cash crops, on food security of developing nations are real reasons behind the food price crisis

Ibrahima Hathie, Center for Democratic Development, Ghana ( 2012 ) analyzes the impacts of world food crisis on Sub-Saharan Africa due to the indispensible role of agriculture with this region The agricultural sector, which accounts for 30% of GDP, is an important source of export earnings and remains the major sector absorbing the growing labor force 60% of the economically active population works in the agricultural sector Meanwhile energy and food security issues have taken center stage in light of the recent food price spike Sub-Saharan Africa was hard hit by the global food crisis Underlying causes of this food crisis include short-term and long-term factors Rising demand in the large developing countries, especially for meat and dairy products, has resulted

in an increased use of grains On the supply side, investments in agriculture have been declining for more than two decades in developing countries while developed countries provided subsidies and trade protection to their farmers, thus further depressing world prices and discouraging investments and production in developing countries (Elliot, 2006) Recently, sharply rising energy prices raised production costs and also contributed to increasing the demand for alternative fuels Under these circumstances, land diversion from cereal to biofuels production could have serious consequences for local communities In many cases, farmers are encouraged to use intercropping but they do not apply the efficient spacing between lines As a result, some farmers have lost up to 60% of their cereal production without securing their jatropha output Therefore, there was a lack of food in Sub-Saharan Africa, whereas, the supply for biofuels was still not enough This paper maps out how energy prices affect food security in Sub-Saharan Africa, as well as give some recommendations for African government to compete with that issue

Caroline Lucas MEP, Andy Jones, Colin Hines ( 2012 ) details the extent

to which 21st century food systems are dependent on intensive energy use, and examines why they are particularly vulnerable to the impact of high energy prices on the fertilisers, pesticides, plastics, aviation fuel, ‘warehousing on wheels’ and ‘just in time delivery’ systems, central to the UK’s supermarket dominated food system The industrialisation of farming accelerated dramatically in industrialised countries after World War Two, and began in many poorer countries as a result of the Green Revolution of the 1950s and 1960s Yet this reliance on fossil fuels - in the form of fertilisers (which accounts for around a third of agricultural energy consumption), pesticides, and hydrocarbon-fuelled farm machinery and irrigation systems – means that industrialised farming consumes 50 times the energy input of traditional agriculture; in the most extreme cases, energy consumption by agriculture has increased 100 fold or more It has been estimated, for example, that 95% of all of British food products require the use of oil The effect of rising oil prices on food production is only half the story, however Its effect on the demand for food commodities is also extremely significant Since virtually all the crops the UK currently grow for food can also be converted into automobile fuel, either in ethanol distilleries or bio-diesel refineries, high oil prices will open a vast new market for farm products Those buying commodities for fuel producers will be competing directly with food processors for supplies of wheat, corn, soybean, sugarcane, and other key crops The report ends by outlining the comprehensive changes necessary to ensure that the food needs of each and every nation are fully met

Sean Thompson gave a presentation to a seminar of economists organised by The International Institute for Research and Education in Amsterdam in November, 2013 The author proclaims that, in 2008, world food prices doubled over the previous year In Fred Magdoff’s words, ‘in 2008, people woke up to a tsunami of hunger sweeping the world Food riots occurred

in many countries in the global South and the discontent stemming from the ongoing volatility of food prices has played a critical part in the events in the Mena region this year, the so-called Arab Spring‘ A more recent cause of the food crisis is the diversion of increasing amounts of soya, maize and palm oil into the production of biofuels (ethanol and bio diesel) For example, in 2008, around 30% of the entire US maize crop was used to produce ethanol Estimates

of the degree to which ethanol production has contributed to the rise in world food price varies from the US Department of Agriculture’s less than 5% to the World Bank’s approaching 80% In addition, the effects of global warming on world agricultural production are starting to make themselves felt In 2008, there were major crop failures in Bangladesh, China and Australia, where wheat and rice crops were devastated by drought, forcing world prices up In 2010, Russia banned grain exports until the end of the year because a drought had destroyed 20% of its crop Climatologists agree that such widespread disruptions in food production will only increase with the growing instability of the climate across many regions These crop failures coincided with the dramatic fall of stock markets, leading to unprecedented speculation in world commodity markets, the effect of which was intensified by the very low level of global food stocks after several years in which demand exceeded supply and the speculation and hoarding at a local level by elements of the various national borgeiosie The

paper describes a view of world oil and food crisis, as well as the factors contributing to those crises These factors combined in 2008 to create a perfect storm – a storm which, although it has abated to some small degree, is still raging

William Laurance ( 2014 ) gives a picture of a big catch: The modern farming agronomists espouse needs energy — lots of energy — relative to that used for small-scale farming It needs energy for farm equipment, irrigation, refrigeration, lighting and crop transport It also needs energy to produce nitrogen fertilizers and yet more energy to mine and transport phosphate All in all, modern farming has a serious thirst for energy For this reason, when energy prices go up, food prices tend to go up From 1990 to 2013, the annual price of oil explained three-quarters of the annual variation in the price of food (cereals, edible oils, meat, dairy and sugar) So, to feed billions of people without destroying nature, we must intensify farming But because intensive farming relies so heavily on energy, energy prices strongly influence food prices By midcentury we’ll need even more: Global energy use is projected to rise by up to

61 percent, according to the World Energy Council, mostly because of growing consumption by the world’s developing economies One of the biggest challenges will be replacing petroleum — a stable, high-energy-density liquid fuel that powers virtually the entire global transportation sector and has countless industrial uses on top of that For this, biofuels are the most plausible alternative

— but there’s a problem here too Even if efficient new cellulosic technologies (which use plant biomass rather than just oils or sugars) should emerge, growing the amount of biofuel crops we’d need would require enormous expanses of arable land — land we’ll desperately need to feed people On top of that, the

competition between agriculture and biofuels will make land, and hence biofuels, more expensive The article claims the relationship between energy and agriculture, while providing two recommendations to tackle the food crisis, which are family planning and energy conservation

These papers show that the world energy crisis has certain impacts on food security, rising food commodity prices, especially in countries depending

on food imports like the UK, or in areas depending on agriculture like Africa However, there is only one paper assessing how the world energy crisis influences the rice price with one rice-exported country It is the report " World energy price shocks can explain Thailand rice price fluctuations : Cointegration test " by Aekapol Chongvilaivan, Institute of Southeast Asian Studies (ISEAS)

Associations ( 2008 ) with the topic of "Cooperation and development of ASEAN agricultural and rural areas in the era of globalization" The report indicates the long-term relationship between the world energy prices and Thai rice price With a rice exporter as Thailand, the impact of the oil crisis on agriculture is not small The article also launched the policy implications to separate the rice market of Thailand out of the effects of energy price shocks

As far as I know, in Vietnam , there are no studies that use quantitative models to examine the relationship between the world energy prices and Vietnam food prices Therefore, my study inherits the ideas from the report of Mr.Aekapol Chongvilaivan to examine whether there are any relationships between the world energy prices and Vietnam rice prices I would use the same model with the model in the report " World energy price shocks can explain

Thailand rice price fluctuations : Cointegration test " by Mr.Aekapol Chongvilaivan Besides, from the experience of Thailand, I will give proposals for Vietnam agricultural policies, especially how to separate Vietnam rice market from fluctuations in the world energy prices

CHAPTER 3 DATA AND METHODOLOGY

3.1 Data

This study used data of Vietnam rice price and the world energy price each year in the period from 1989 to 2014 from websites of Vietnam Ministry of Industry and Trade, Viettrade, Vietnam Customs and Vietnam Ministry of Finance; International Financial Statistics (IFS); International Monetary Fund (IMF) and some other related ones

Figure 3.1 World crude oil spot price in the period of 1989-2014

The first oil crisis occurred in 1973 when oil prices increased dramatically from 20 USD / barrel to 45-50 USD / barrel and the second one happened in 1979 when oil prices doubled from 50 USD / barrel to around 100 USD / barrel Then oil prices decreased gradually and became relatively stable since 1985 at 20-30 USD / barrel

During this period, in late 1990, oil prices skyrocketed from 30 USD / barrel to 55 USD / barrel, but quickly returned to the normal level of 30 USD / barrel in early 1991, so this should be considered only as a spike, not having severe impacts as the previous crises Starting after the 2004, oil prices increased continuously and steadily In September, 2003, oil prices are below 25 USD / barrel, in August, 2005 they doubled up to over 60 USD / barrel In September,

2007, oil prices rose to above 80 USD / barrel and above 99 USD / barrel in December, 2007

This has created the fear of the probable third energy crisis, longer than two previous ones According to the world's energy experts , in 2015, oil prices could rise to 380 USD / barrel Oil price of 60 USD / barrel was high enough levels to impact the global economy in general, as the fact of the previous oil crises has shown Therefore, abnormal changes in oil prices this time would have such great and awful effects on the world economy It really would be a tsunami for all mankind as many economic analysts have envisioned If right now the world does not find a way out of our dependence on oil by using alternative energy, the tragedy of humanity is inevitable

The world’s growing thirst for oil is likely to create disequilibrium between crude supply and demand, thus triggering price fluctuations at stock exchanges around the globe Over the past decade, consumption volumes have

risen from under 80 million barrels per day in 2002 to almost 90 million barrels per day in 2012 Driven by global economic growth, West Texas Intermediate crude reached annual average price levels near 100 US dollars per barrel for the first time in 2008, when worldwide oil consumption exceeded production by over three million barrels daily Although the difference can be accounted for by the production of biofuels and oil from unconventional sources, these figures show why adjustment measurements are required to balance supply and demand

in the international crude oil market

Economic theory has shown that prices are a key element to adjust supply and demand, but political frameworks appear to be the crucial factor in this case The WTI price trend will likely be affected by the quality of pipeline infrastructure between the US Gulf and the nation’s oil-trading hub at Cushing,

as well as political trends in other oil producing regions With U.S shale gas production on the rise, and with Russia accounting for approximately 13 percent

of theworld’s oil production volume, oil prices may just continue their rollercoaster ride through 2014 and well into 2015 InSeptember 2014, one barrel

of WTI crude cost around 93 U.S dollars, while the price for a barrel of Brent stood at around 97 U.S dollars

Figure 3.2 Vietnam rice export price from 2003 to 2014 ( 4 types )

(Source : moit.gov.vn and drawn by the author )

Figure 3.3 Vietnam average rice price from 1989 to 2014

Average rice spot price

Average rice spot price