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 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 INTRODUCTION .1 1.1 Research objectives 1.2 Research questions 1.3 Research scope 1.4 Methodology CHAPTER LITERATURE REVIEW CHAPTER DATA AND METHODOLOGY 15 3.1 Data 15 3.2 Methodology : Engle-Granger cointegration test 20 CHAPTER RESULTS AND DISCUSSIONS 23 CHAPTER CONCLUSION 30 CHAPTER LIMITATION 33 REFERENCES 34 APPENDIX 36 APPENDIX 38 APPENDIX 40 i ABBREVIATIONS APEC Asia-Pacific Economic Cooperation ECM Error correction model FAO Food and Agriculture Organization GDP Gross Domestic Product IFS International Financial Statistics IMF International Monetary Fund UK United Kingdom US United States USD United States dollar USDA United States Department of Agriculture WTI West Texas Intermediate ii LIST OF TABLES Table 4.1 Dickey-Fuller test on rice price in level Table 4.2 Dickey-Fuller test on oil price in level Table 4.3 Respective statistics Table 4.4 Dickey-Fuller test on rice price in 1st difference Table 4.5 Dickey-Fuller test on oil price in 1st difference Table 4.6 Respective statistics Table 4.7 Least squares estimate Table 4.8 Dickey - Fuller test on εt iii LIST OF FIGURES Figure 3.1 World crude oil spot price in the period of 1989-2014 Figure 3.2 Vietnam rice export price from 2003 to 2014 ( types ) Figure 3.3 Vietnam average rice price from 1989 to 2014 Figure 3.4 Some countries’ rice export price from November, 2011 to December , 2012 iv ACKNOWLEDGEMENT During the time of accomplishing this thesis, I have received enthusiastic support and encouragement of many people First of all, I would like to express my sincere thanks to my instructor, M.Econ Tran Viet Dung, who has instructed, supported and helped me dedicatedly to achieve a clearer structure and a better content so that I can complete this argument 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 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 : (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 ? 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 30 CHAPTER CONCLUSION This paper used the cointegration test to experimentally assess the effects of skyrocketing energy prices on Vietnam rice market The results show that the world energy prices have contributed to increasing Vietnam rice prices in the long term The main reason for why sharp increases in energy prices perturb the rice market in Vietnam is the rising cost of rice production Vietnam exports petroleum and gasoline , but mainly crude oil and imports diesel oil, fuel In 2010, Vietnam has exported nearly million tons of fuel types (excluding crude oil), grossed more than 1.3 billion USD However, only in the first months of 2012, Vietnam has imported 2.9 million tons of fuel types, equals to over billion USD In particular, diesel oil accounted for 47.6% equivalent to 1.1 million tons, and 1.1 billion USD Petrol accounts for 27.8%, with 661.3 thousand tonnes worth 742.2 million USD With such a large volume of imports, production and transportation costs in rice production are affected extremely heavily Besides, Vietnam rice market is affected by the food price crisis in the world, speculation on rice markets and the trend of rushing into biofuels in the world Compared to Thailand, one of the reasons why the cost of rice production has correlated closely with the world energy prices is that cultivation in Thailand depends heavily on petroleum products as fertilizer, farm equipments, and transportation To solve this problem, policy makers should promote Thai farmers to save energy, use environmentally friendly cultivation methods and alternative materials for fertilizers from animal and plants waste 31 Exclusive in Thailand rice market is another threat making investors and speculators hedge against increases in prices due to the energy price shocks Measures to that issue are quite simple, which is promoting competition in rice trading system Currently, only a few companies dominating the rice trading system are benefitting from higher rice price However, this situation seems to get worse as the Government plans to adjust the market by establishing a cartel in the way of the Organization of Petroleum Exporting Countries (OPEC) (Fuller, 2008) Mr Aekapol Chongvilaivan has given doubts about the effectiveness of energy security policies in Thailand recently These policies have encouraged production of biofuels, especially those supporting ethanol and biodiesel productions as palm oil, sugar and tapioca Thousands of hectares of cultivated area has been transferred from planting rice to biofuels Currently, it has been estimated that the energy crisis has led to a situation of rushing into biofuels, making rice prices increase by 75% and is the main reason causing the rice crisis in Thailand Based on the experience of Thailand, I would like to offer some solutions to reduce the impact of the world oil price fluctuations on Vietnam rice market as following:  Do not switch cultivated areas from planting rice into crops for production of biofuels, in order to avoid reducing rice production and the volume of exports Vietnam is a rice-exporting country, rice is our main export commodities , contributing significantly to the annual export turnover 32 Reducing the volume of rice exports will affect directly the socioeconomic development of the nation  Implementing some financial measures to manage and stabilize the price of energy The petroleum production in Vietnam can only meet 30% of the domestic demand Most of petroleum products are still imported from abroad Therefore, fluctuations in the world oil prices directly affect domestic prices The state should have the practical measures on the petroleum market, ensuring production and transport costs in agriculture  Using clean and sustainable energy such as solar energy, wind energy Vietnam has abundant primary energy source, which can be used without importing Source of solid waste caused major environmental problems, although it also means raw materials utilized to produce electricity Vietnam has many advantages for the development of green, wind and solar energy, but the exploitation of these resources remains limited The state should encourage the use of new and renewable energy and attract foreign investment in energy development 33 CHAPTER LIMITATION My research used data from 1989 to 2014, the number of observations is 26 years Because Vietnam just started exporting rice from 1989 to now, I can not get longer data strings In addition, the data of Vietnam rice prices from 1989 to 2003 were not generated each quarter or each month , but over the year, which preventing me from splitting the data strings quarterly or monthly Therefore, the accuracy of the model is not so high My research brings out some solutions to reduce impacts of the world energy prices on food prices in Vietnam However, these are macroeconomic measures, requiring lasting efforts of both the Government and enterprises, because Vietnam is one small country, bearing a lot of effects from price fluctuations in the world 34 REFERENCES Tran Manh Tri, 2007 The world third energy crisis Light Magazine, 2007 Ronald Trostle , 2008 Global agricultural supply and demand: Factors contributing for the recent increase in food commodity prices Aekapol Chongvilaivan, Institute of Southeast Asian Studies (ISEAS), 2008 World energy price shocks can explain Thailand rice price fluctuations : Cointegration test 33rd Annual Conference - Federation of ASEAN Economic Sciences Associations, 2008 Jannie de Villiers, 2008 International energy crisis removes bread from our table Aditya Chakrabortty, 2008 Secret report: biofuel caused food crisis The Guardian , 2008 Anuradha Mittal , Executive Director of the Oakland Institute , 2009 The 2008 Food Price Crisis: Rethinking Food Security Policies Than Thi Thu Thuy, 2011 Impacts of world energy prices on Vietnam consumption price index Ibrahima Hathie, Initiative Prospective Agricole et Rurale, Senegal Benedict Yiyugsah, Center for Democratic Development, Ghana, 2012 Energy and food security in Sub-Saharan Africa : Global crisis, local impacts Caroline Lucas MEP, Andy Jones, Colin Hines, 2012 Fuelling a Food Crisis: The impact of peak oil on food security 10 Sean Thompson , The International Institute for Research and Education 35 in Amsterdam, 2013 Return of the food and energy crisis: structural problems and/or financial speculation? 11 William Laurance, 2014 Food + Energy = Crisis? 12 www.statista.com/statistics/209641/average-annual-spot-price-of-wti-and brent-crude-oil/ 13 Vietnam Ministry of Industry and Trade moit.gov.vn 14 viettrade.org 15 Vietnam Customs customs.gov.vn 16 Vietnam Ministry of Finance mof.gov.vn 17 International Financial Statistics 18 International Monetary Fund imf.org 36 APPENDIX World crude oil in the period of 1989-2014 WTI crude oil spot Europe Brent crude oil Average crude oil price spot price spot price ( USD/barrel) ( USD/barrel) ( USD/barrel ) 1989 22.45 21.31 21.88 1990 24.53 23.76 24.15 1991 21.5 20.43 20.97 1992 20.58 18.99 19.79 1993 18.48 18.06 18.27 1994 17.19 16.34 16.77 1995 18.43 17.02 17.73 1996 22.03 20.67 21.35 1997 20.61 19.55 20.08 1998 14.4 13.26 13.83 1999 19.3 18.64 18.97 2000 30.38 28.66 29.52 2001 25.98 24.46 25.22 2002 26.18 24.99 25.59 Year 37 2003 31.08 28.85 29.82 2004 41.51 38.26 39.89 2005 56.64 54.57 55.61 2006 66.05 65.16 65.61 2007 72.36 72.44 72.4 2008 99.67 96.94 98.31 2009 61.95 61.74 61.85 2010 79.48 79.61 79.55 2011 94.88 111.26 103.07 2012 94.05 111.63 102.84 2013 97.98 108.56 103.27 2014 87.88 90.11 88.995 ( Source :http://www.statista.com/statistics/209641/average-annual-spot-price-of-wti-and brent-crude-oil/ ) 38 APPENDIX Vietnam rice export price from 1989 to 2014 Price ( USD/ ton ) Year Average price ( 5% 10% 15% 25% USD/ton ) 1989 N/A N/A N/A N/A 221.43 1990 N/A N/A N/A N/A 226.1 1991 N/A N/A N/A N/A 186.3 1992 N/A N/A N/A N/A 226.2 1993 N/A N/A N/A N/A 207.3 1994 N/A N/A N/A N/A 203.5 1995 N/A N/A N/A N/A 214.5 1996 N/A N/A N/A N/A 266.1 1997 N/A N/A N/A N/A 285 1998 N/A N/A N/A N/A 242.1 1999 N/A N/A N/A N/A 265.1 2000 N/A N/A N/A N/A 221 39 2001 N/A N/A N/A N/A 192.2 2002 195 N/A N/A 175 185 2003 230 217 209 190 211.5 2004 240 237 231 227 233.75 2005 260 257 253 248 254.5 2006 277 273 266 260 269 2007 307 302 297 292 299.5 2008 545 435 415 410 451.25 2009 422 415 397 387 405.25 2010 470 465 460 448 460.75 2011 510 495 485 480 492.5 2012 465 455 445 430 448.75 2013 455 450 440 420 441.25 2014 445 435 420 405 426.26 ( Source: moit.gov.vn and synthesized by the author) 40 APPENDIX The situation of Vietnam rice export Since the Renovation, Vietnam's rice sector has made significant progress In 2006, agriculture contributed to 21.8% of GDP density and make careers for 67.3% of the population, and rice is the most important agricultural products accounted for 84% of cultivated area and 85% of food production Vietnam has become the second largest rice exporter after Thailand in 1997 and rice is always an important agricultural export product of Vietnam The number and volume of rice exports have increased after several years Table The number and volume of Vietnam rice exports 2003- 2007 Year Volume (thousand ton) Value (1000 USD) 2003 3,813 719,916 2004 4,063 950,315 2005 5,250 1,407,229 2006 4,642 1,275,895 2007 4,558 1,489,970 (Source : Food and Agriculture Organization of the United Nations - FAO) Some of Vietnam's main rivals in the field of rice exports: Thailand, Myanmar, India, Pakistan, the United States and China 41 Rice production in Vietnam - an important resource for export: Rice is a crop that can be grown best in areas with cheap labor, rainfall owing to the fact that rice needs a large labor force to harvest and water to grow Therefore, Vietnam is an ideal place to grow rice Vietnam rice area decreased continuously from 2000 to 2008 and increased slightly in the period from 2008 to 2010 In 2010, the cultivated area of rice is 7.5 million hectares, down 150,000 hectares compared to the area in 2000 However, rice production is increased In 2010, Vietnam rice production is about 40 million tons, increased by 7.5 million tons from 32.5 million tons in 2000 The result is quite good, about 2.4% per year Table Vietnam rice index from 2000 to 2010 Year Cultivated area Production (1000 (1000 ha) metric tons) Output (ton/ha) 2000 7,666.300 32,529.500 4.243 2001 7,492.700 32,108.400 4.285 2002 7,504.330 34,447 160 4.590 2003 7,452.200 34,568.900 4.639 2004 7,445.000 36,149.000 4.860 2005 7,326.000 35,791.000 4.885 2006 7,324.800 35,849.500 4.894 2007 7,180.700 35,917.900 4.991 42 2008 7,414.100 38,724.800 5.220 2009 7,440.100 38,895.500 5.230 2010 7,487.480 39,994.600 5.340 (Source: FAO) There are still many limitations in Vietnam rice production, such as high production costs, unsustainable agricultural production, natural disasters, poor infrastructure, especially irrigation, transportation in mountainous areas and rice storage facility in the Mekong delta The major customers of Vietnam: China becomes the country with the largest amount of rice imported from Vietnam Along with China, Hong Kong, Taiwan, within months, imported 87,000 tons of rice These markets imported nearly 1.9 million tons of rice from Vietnam, accounting for nearly one sixth volume of rice exports Southeast Asia is the largest market of Vietnam rice Philippines, Malaysia, Sinagpore, East Timor and Brunei imported from Vietnam more than 1.93 tonnes during the same period Figure The largest markets of Vietnam rice export in 2010 43 ( Source : Vietnam Customs Office) The impact of the Vietnam Government in rice sector : The Government of Vietnam is promoting the benefits of rising global prices to raise export production and ensure supply for domestic needs Rice inflation has been more favorable to farmers But Prime Minister Nguyen Tan Dung was hesitant for increasing rice exports owing to the fear of affecting domestic supply Rice prices on the Chicago Mercantile Exchange have jumped by 75% compared with last year data Earlier this year, Vietnam also offers export limits The government wants to reduce domestic prices and secure its supply in the face of inflation, which reached 25% last month Vietnam Government has allowed the rice exporters to reserve million tons of rice to keep prices stable after two first months shipments fell by 40% compared to the same period last year They are required to pay at least 000 VND per kg for coarse rice to benefit farmers at least 30% profit 44 Market conditions may improve in the second quarter as demand for rice from China, Indonesia, Malaysia and the Philippines remains high The Government of Vietnam has carried out many positive policies to achieve efficiency and productivity in rice production, for example, the implementation of policies on the management of agricultural land (paddy soil protection) and promotion in investment and development of infrastructure for economic development of the local economy specializing in producing rice ... 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,... represents the impact of the energy price shocks to the rice price, so it shows the effects of increased energy price to both rice production and consumption My hypothesis is born from the idea... 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