Thai farm subsidy creates rice mountain; the effects on world prices could be serious if Thailand floods the market with its rice

July 17, 2013 2:52 pm

Thai farm subsidy creates rice mountain

By Emiko Terazono

Europe has had its butter mountain and wine lake. Now the Thai government is sitting on a rice hoard large enough to supply half of global imports for a year – and traders fear a price collapse as it starts to sell. Bangkok’s rice buying policy, designed to boost farmers’ incomes, has led to a stockpile of 17m-18m tonnes. With the new crop set to be harvested in October, the Thai government needs to dispose of its existing inventory to raise money for the new purchases. Rice market experts are on high alert as Bangkok could issue tenders for about 350,000 tonnes of its rice as early as next week. Concepción Calpe, senior rice analyst at the Food and Agriculture Organisation in Rome, warns the effects on world prices could be serious if Thailand floods the market with its rice. “It could potentially have catastrophic consequences,” she said.Bangkok has been buying rice from farmers at about 40 to 50 per cent above market prices, leading to state losses of $4.4bn during the crop year to September 2012, the government said.

The populist purchasing scheme has alarmed international economists and debt analysts, prompting credit rating agency Moody’s to warn last month that the “increasingly expensive” scheme was negative for Thailand’s sovereign ratings. The losses from the policy “increase the difficulty of the government’s task of reaching its goal of a balanced budget by 2017”, said Moody’s.

Following the Moody’s report, Prime Minister Yingluck Shinawatra quickly replaced the minister of commerce in charge of the rice purchase scheme, and the government announced that the official rice buying price would be cut by 20 per cent. However, after protests by farmers, it quickly reversed its decision, triggering volatility on the rice markets.

Thailand has long prided itself as the world’s leading rice exporter but the scheme, which replaced a direct farmers subsidy after Ms Yingluck came to power in 2011, has hit its overseas rice sales. The state-supported prices have made the country’s rice exports uncompetitive compared with those of other producers including India and Vietnam, and Thailand fell from its top spot last year to third place.

Thailand’s overseas sales plunged 35 per cent to 6.9m tonnes in the 2011-12 crop year, while India, which relaxed its export restrictions in 2011, exported a record 10.3m tonnes of rice in 2012, making it the largest exporter for the first time.

Thitinan Pongsudhirak, a professor at Chulalongkorn University in Bangkok, believes that the rice buying scheme has been a “disaster” for the country. “Fundamentally it’s a poorly conceived policy. It’s unsustainable and not tenable in the long term,” he adds.

Bangkok’s artificially high official purchase prices have led to allegations of fraud, with some farmers accused of passing off lower grade rice as high quality stock, as well as claims of traders smuggling of cheaper rice from neighbouring Cambodia and Myanmar into Thailand.

It’s a poorly conceived policy. It’s unsustainable and not tenable in the long term

– Thitinan Pongsudhirak, professor Chulalongkorn University

The policy has also meant that the country’s rice price, long a global benchmark, is no longer used by institutions such as the FAO and the Organisation for Economic Co-operation and Development, which have instead started to use the Vietnamese rice price in their reports.

“[The Thai government] has completely distorted the market,” says Ms Calpe of FAO.

Bangkok is not alone in facing the unintended consequences of farming subsidies. Europe’s common agricultural policy led to overproduction, while India is currently struggling to get rid of its massive state wheat stockpile.

“Every country creates its own demons,” says Rahul Bajoria, regional economist for Barclays in Asia.

Yet critics of the ruling Puea Thai party points out that it has put itself in a position where it cannot pull back from its populist pledges even as they add to the fiscal burden.

As well as the rice buying programme, Ms Yingluck, the sister of the exiled former leader Thaksin Shinawatra, introduced aminimum wage and subsidy schemes for first-time car and home buyers. Earlier this year, she also announced an ambitious plan to invest $66bn in infrastructure development projects.

With elections expected to be called next year, the government needs the support of the country’s rice farmers, especially those in the northeast of Thailand, who are not the ruling party’s natural supporters, says Romen Bose, analyst at country risk consultancy IHS.

The Thai rice hoard could yet grow larger.