Thailand’s Ruinous Rice Subsidy; Yingluck Shinawatra’s bid to corner the rice market rots away

Updated June 20, 2013, 5:03 p.m. ET

Thailand’s Ruinous Rice Subsidy

Yingluck Shinawatra’s bid to corner the rice market rots away.

On Wednesday Thailand agreed to cut the price it pays for farmers’ rice crops by 20%, in what may be the first step in unwinding a disastrous rice subsidy program. This retreat won’t undo the fiscal damage already done by the two-year-old scheme, which saw the government buy local rice harvests for as much as 50% above market rates and then fail to engineer a similar price hike globally. But it does provide a good lesson in the dangers of meddling with markets.Earlier this week the government of Prime Minister Yingluck Shinawatra admitted that its rice scheme had lost $4.4 billion for the 2011-12 growing season, a huge sum for a program sold as cost-neutral. The original pitch was that the plan would first function as a welfare handout by replacing private rice dealers with inflated government payments to farmers. Then, in phase two, the world’s top rice exporter would drive up global rice prices by withholding its crops from the market. Once prices rose high enough, Bangkok could recoup the investment by selling off its stockpiles.

Predictably, the market wanted nothing to do with Ms. Yingluck’s clumsy attempts at price manipulation. Sensing an opportunity to gain ground, rice exporters in other countries—notably Vietnam and India—rushed in to fill the shortfall. Meanwhile, private-sector Thai exporters responded by investing in emerging producers such as Cambodia, Laos and Burma.

Global prices stayed low throughout 2012, and the Thai government, still committed to overpaying for farmers’ rice, amassed ever-larger stockpiles rather than sell abroad at a steep loss. Last year the country’s rice exports plunged 37% to 6.73 million tons. India has surpassed Thailand as the world’s leading rice exporter.

Now Bangkok must face a fiscal reckoning. All told, reported rice scheme losses for 2011-12 could eat up 5.6% of Thailand’s projected budget in a year when the country is set to run its sixth straight deficit. This month Moody’s MCO +0.12% cited rice-scheme losses as a negative factor in the country’s credit rating.

Those losses are probably even higher than reported, as the government still hasn’t figured out what to do with the 17 million tons of excess rice it has warehoused since 2011. Time is running out—rice goes bad after one to two years in storage—and the government will likely have to settle for a price well below what it paid.

This week’s price cut for the 2013 harvest will slow future losses, but only up to a point. Thailand’s rice will still cost more than Vietnam’s and India’s, and the Thai government will have to swallow the difference in order to market its rice abroad says Samarendu Mohanty of the International Rice Research Institute. What’s more, the return of Thai rice to the market will lower world prices further, increasing Bangkok’s bill.

Responding to criticism of her rice program’s losses, Ms. Yingluck said this week that what really matters is how her scheme has improved farmers’ livelihoods. In reality, the rice subsidy has only created dependence on unsustainable handouts. Now that the government plans to scale back its assistance, farmers’ groups have threatened to shut down Bangkok with protests.

If Ms. Yingluck is serious about helping rural Thailand, she could focus on improving crop yields. Despite Thailand’s reputation as a leader in rice cultivation, the World Bank recently ranked the country last in average paddy productivity among major producers. That’s in part because many Thai farmers still rely on rain-fed cultivation instead of higher-yield irrigation systems.

All government takeovers of private industry are doomed to fail sooner or later. But the speed at which Thailand’s rice scheme has tanked is a testament to how badly Ms. Yingluck and her Pheu Thai party misjudged the global rice market. Promises of rural handouts may have helped her win the 2011 general elections, but since then it has yielded only angry citizens, wasteful spending and warehouses filled with rotting rice.