Thailand's Half-Baked Rice Plan

The Thai government’s plan to fulfill a populist campaign pledge by subsidizing rice could leave it holding vast stocks of rice with nowhere to sell it, economists say. At some point, Thailand may be forced to dump the excess at a loss on the open market.

Despite a 26 percent spike in prices as a result of a promise to buy rice from farmers at a steep premium, earlier expectations that world prices would soar further do not appear likely to come true, analysts and economists say. Instead the Pheu Thai government headed by Prime Minister Yingluck Shinawatra, could preside over a drop in prices everywhere but in Thailand, where the subsidized prices are likely to end up irritating consumers.

“It’s a buyer’s market,” said Samarendu Mohanty, the chief economist for the International rice Research Institute in the Philippines. Global stocks to usage ratios have been rising for six straight years despite a series of panics, including the current one, and are expected to do so for a seventh year despite bad weather in some rice-growing regions, with 2011-2012 output expected to rise by 3 million tons more than demand.

Thailand is currently the world’s biggest rice exporter, controlling 25.2 percent of global trade, followed by Vietnam at 22 percent, Pakistan at 12.3 percent and India at 11 percent.

The Thai price intervention resurrects an earlier policy by Yingluck’s brother Thaksin Shinawatra in 2004, before he was ousted in a 2006 coup. It is expected to begin in mid-October, with the government paying rice farmers a minimum price of about US$500 per ton, more than 60 percent higher than the market rate before the July election. The original scheme was criticized for graft and high cost. A 2010 study by the Thailand Development Research Institute found that the government lost US$628 million in the scheme and that few of the benefits actually went to farmers.

If human nature works as it always has, the higher price will motivate Thai farmers to plant every hectare they can get their hands on to sell the rice to the government. It is expected that the government will have to buy as much as 2 million extra metric tons of rice. Local Thai stockpiles are currently at 6 million tons, and are expected to rise to 8 million tons by mid 2012.

“As I look at it, it is a very confused market,” said IRRI’s Mohanty. “They have too much rice, and so I don’t expect a price increase unless we have major weather problems. In the long run, there is a lot of confusion on how Thai policy is going to work — how can they buy it and what they will do with it.”

At some point, as stocks build, Mohanty says, the government may be forced to sell its expensive rice in the global market, creating a market overhang that would drive prices down and create bigger losses for the government — unless, as he says, bad weather or some other catastrophe intervenes, creating a global shortage. That would make Yingluck “look like a genius,” Mohanty said.

A plan under discussion to form a cartel with Vietnam and other Southeast Asian nations to drive up world prices is probably a non-starter as well, given the vociferous opposition of the World Bank and the World Trade Organization. A similar plan was dropped in 2008.

Thailand might learn a lesson from both United States and European Union agricultural policies from the 1970s, when both had price supports in place. The United States in the 1970s and 1980s subsidized durum wheat production in the northern Midwest, resulting in vast mountains of wheat, forcing the US to subsidize sales below world prices.

The European Union has paid dearly for subsidies on dairy products and wine. In 2009, the European Commission artificially boosted prices by buying 130,000 metric tons of dairy products at a cost to the taxpayer of 237 million pounds sterling.

Once in place, subsidies and price supports are extremely difficult to remove. In 2007, the European Commission sought to scrap such payments, a reform that was blocked by Germany and particularly France, whose farmers rioted in the streets. Indonesia, Malaysia and the Philippines have already learned their lesson by subsidizing fuel and other commodities. A decision to end the fuel subsidy in Malaysia played a role in making former Prime Minister Abdullah Ahmad Badawi unpopular in the run-up to the 2008 election in which the ruling party for the first time in 50 years lost its two-thirds majority in Parliament.

Notwithstanding the price rises since the policy was announced, Mohanty and others say that’s probably about as high as they will go, news stories to the contrary. Although at first there were concerns that the policy would create a global rice shortfall, it appears that Vietnam and India are more than willing to step in to sell. Given the steepening price of Thai rice, importing nations have turned to other countries, already forcing Thailand to cut its export forecast for 2011-2012 by 20 percent, to 8 million metric tons.

Despite bad weather in various rice exporting regions, output has been steadily gaining across the globe, with global stocks on the rise. Pakistan’s crop is expected to rebound by 45 percent in 2011-2012, to 6.8 million tons. Pakistan is expected to export as much as 3.9 million tons, 12.3 percent of world trade, according to Research-Works, a Shanghai independent research firm specializing in commodity research. Strengthening monsoon rains in India have improved local crop conditions to the point where exports are expected to rise to as much as 4 million tons.

Rice prices have been volatile. Despite the rise since July, there seems little reason other than market panic. In 2007-2008, the price soared from US$300 per metric ton to over US$1,100 before falling back to about half that. The International Food Policy Research Institute, in a report earlier this year, said that while financial market speculation may have played some role, export restrictions and panic purchases turned a critical situation into a full-blown crisis.