A year on, Thai Rice Subsidy Still Looks a Mistake

Just a year after Thailand's Pheu Thai government introduced its controversial rice subsidy program, it has done exactly what economists said it would do. It has resulted in Thailand's possible loss of its position as the global leader in rice production, added millions of tonnes to government warehouses, and kept the country's 8 million rice farmers blissfully happy.

Now Thailand must try to figure out what to do with its surplus rice. If it puts large amounts onto an already-glutted world market, that would drive the price down further. Global rice on 23 August was selling at US$580 per tonne, 44.1 percent below its cyclical high and 0.3 percent below a year ago according to the United States Department of Agriculture.

The country has led global rice exports in the world for nearly five decades, with volumes increasing steadily from 1 million tonnes in 1974-75 to more than 10 million in 2010-11. Its global export market share peaked at 43 percent in 1988-89. Since that time, it has still fluctuated between 25 percent and 30 percent at a period when the global rice trade tripled, from 11 million to 33 million tonnes. China, the United States and Malaysia have traditionally been the biggest importers of Thai Jasmine rice.

Prime Minister Yingluck Shinawatra's Pheu Thai government lived up to its campaign promise made a year ago when it promised to pay rice farmers a 50 percent premium over global prices. As a result, the rice pledging scheme, as it is called, caused farmers to increase their plantings exponentially: "from fence to fence," as one economist told Asia Sentinel at the time. Indeed, despite devastating floods that inundated 20 central Thai provinces and cut rice production by an estimated 6 million tonnes last year, the country still managed to duplicate its 2011 production of 20.2 million tonnes.

Introduction of the Thai price supports also caused the global price of rice to spike upwards by 25 percent to near US$600 per tonne as other global producers took advantage of Thailand's expenditures to price their own rice somewhat near the Thai price. The global price has since drifted back down on plentiful supplies.

As far too many Asian countries have learned to their dismay, putting a subsidy in place is easy. Dismantling it is next to impossible. From Indonesia to Malaysia to the Philippines, government attempts to reduce or remove subsidies on items as diverse as cooking oil and petrol have often resulted in riots and badly damaged support for the government. The government has been forced to buy as much as 10 to 12 million tonnes of surplus rice at least US$100 per tonne over world prices. Nonetheless, a top Commerce Ministry official said earlier this month that the rice pledging program would continue.

With Thai government prices well above global prices, Thailand is no longer competitive, meaning trouble for the rice milling and other export operations that depend on the global trade.

India surpassed Thailand as the world's largest rice exporter, with overseas shipments of 3.61 million tonnes at the same time Thailand shipped 3.6 million tonnes, a Thai slump in exports of 45.8 percent. It appears likely that Vietnam will also surpass Thailand as well, having shipped 3.52 million tonnes as of July 10.

Whether India and Vietnam will continue to top Thailand is uncertain.

"Is this the end of the dominance of Thailand in the global rice market," asked Dr Samerendu Mohanty, an economist with the International Rice Research Institute in Los Banos, Philippines. "The answer to this question is not a categorical 'yes' or 'no.' It depends on developments on several fronts. If Thailand disbands its pledging program, it will keep its top post, at least in the immediate future."

However, Mohanty said, even if the country were to drop the pledging program, Thailand's stay at the top could be short-lived. Myanmar, which under colonial rule was perennially the world's top rice exporter, is emerging from its decades of disastrous socialist rule and is projected to begin modernizing its agricultural sector. Cambodia as well is endowed with fertile lands and a favorable natural environment. Both can expand their production and take away market share from Thailand, Mohanty said.

In particular, the government established the Myanmar Rice Industry Association in 2010 by merging producers, traders, and millers associations, aiming to speed up the development of the sector by attracting private investment and raising the sector's concerns to the government. It has also passed the right to export from government hands to private enterprise.

India has undertaken similar measures to rationalize its rice sector and shows no sign of giving up its primacy and a rice producer, and particularly has switched some of its production from basmati to milled white rice--Thailand's mainstay--although Thailand rice quality remains the best in the world.

Quoted prices for Thai white and parboiled rice were higher by nearly US$200 per ton than their Indian counterparts during the initial months after India's resumption of non-basmati rice exports. Although the price difference has narrowed with the steady decline in Thai price quotations in recent months, the price difference still remains around $100 per ton, Dr Mohanty said.

India, the economist continued, is emerging as the frontliner in agriculture in general and could become a global food basket, an astonishing accomplishment for a country that for decades, perhaps centuries, has been plagued with starving millions. However, India?s big problem seems not to be growing enough food but of distributing it to its poor. Stories have abounded of rotting tonnes of food while people starve in close proximity to the rotting produce.

Both Myanmar and Cambodia must overcome many obstacles, including poor infrastructure -- port facilities, roads, irrigation, rural electricity, etc., inadequate availability of credit, inputs, and quality seeds; and other supply chain constraints before the presence of either will be felt in the international rice market, Mohanty said.

"In the end, it all depends on how fast the global rice trade expands. If global rice trade volume follows the trend of the past two decades, it is possible to have enough maneuvering space for all exporters, including the new entrants," he continued. "Hence Thailand will continue to hold on to the top position. But irrespective of what happens to Thailand's status in the global rice market, it is exciting to see the prospect of new exporters in the rice market. This will definitely bring more stability to the market and improve global food security."