Impacts of Water Supply Changes on the Rice Market of Lao PDR: Stochastic Analysis of Supply and Demand Model

Laotian rice producers in upland areas experience highly fluctuating yields and production and producers in wet season rice areas in the southern region face high price risk. This paper examines the exposure to risk of producers in both regions facing changes in water supplies. A supply and demand model of rice in Laos, considering water supply changes, is developed and stochastic elements are added to the model to represent uncertainty in climatic variables. Furthermore, the risks associated with price and production fluctuation are evaluated by using the differences between market and certainty equivalent prices. The results show that the coefficient of variation of production is higher in upland rice than wet and dry season rice, i.e., 0.3226, and if the fluctuation of water supply increases 20%, the coefficient of variation of production will increase about 20% for all type of rice cultivation. In the case of expanding water supply fluctuations, potentially due to climatic change, the price risk of wet season rice will increase from 48.5 kip to 150.8 kip while that of upland and dry season rice will increase from 66.4 kip to 94.9 kip and 14.3 kip to 20.5 kip respectively. Examining provincial price risk of wet season rice, the differences between market and certainty equivalent prices are 56.3 kip and 33.9 kip in Champasack and Attapeu provinces. The regions or provinces which suffer highly fluctuating production and price risk may need to consider alternative water management and harvesting methods.