Thailand's Ill-conceived Rice Subsidy

Although Thailand appears to be veering closer to a major economic dilemma with its rice subsidy program, it appears likely the government will extend it at least through the current harvest season, with substantial consequences for the global rice market.

By fulfilling a campaign promise by the Pheu Thai Party to pay roughly 50 percent over global prices to rice farmers, the government now has somewhere between 11 million and 15 million tonnes of rice moldering in rice millers’ warehouses, and nowhere to sell it on global markets except at a big loss. With the arrival of the rice harvest season in November and December, the government must now clear warehouses of 4 million to 5 million tonnes by selling off the stored rice below cost.

“They have to sell it a low price, they can’t keep stocking it,” said Samerendu Mohanty, senior economist at the International Rice Research Institute (IRRI)in the Philippines. “They have to make space for the new crop. They have got themselves in quite a fix, they might have to sell four to five million tonnes to make space for incoming rice.”

The Pheu Thai government, whose rural constituency encompasses the country’s 3.7 million rice farming families, made the promise to pay well over global prices during the 2011 election that brought the party to power. However, as many Asian countries have learned to their sorrow, instituting a subsidy means climbing onto the tiger’s back.

Once put in place, subsidies are difficult if not virtually impossible to discontinue, as the Yudhoyono government learned earlier this year in Indonesia when it sought to discontinue fuel subsidies and reaped riots. Attempts to cease fuel subsidies played a part, along with discontent over corruption and other issues, in electoral losses for the government of former Premier Abdullah Ahmad Badawi in Malaysia. Badawi was driven from power after a revolt in his own party.

There are also questions how much the program benefits the farmers, other sources say. Although famers do undeniably benefit from higher prices, it is the middlemen who make out the most in the long run.

If the government puts the surplus onto world markets even at a loss, which is expected to be as much as US$200 per tonne, that is likely to drive down global rice prices, to the benefit of Indonesia and the Philippines, which are net purchasers, as well as several African countries, Mohanty told Asia Sentinel in a telephone interview.

Research-Works, a Shanghai-based financial research firm that specializes in commodities, said in its latest Commodities Monitor, which is delivered to private clients, that “The outlook for rice prices now seems more bearish given that Indian exports received the green light for 2012-2013. Thai government rice inventories continue to rise, up to 14.5 million tonnes of milled equivalent as of 17 October. Additional funding has been approved to purchase a further 1.39 million tonnes, taking the total 2012-2013 purchase target to 14.7mn tonnes. We are not sure when the saga will come to an end although 2013 now looks more likely. Watch this space closely.”

Thailand has been the world’s biggest rice exporter for nearly five decades, with export volumes increasing steadily from 1 million tonnes in 1974-75 to more than 10 million in 2010-11. Its share of the global market peaked at 43 percent in 1988-89, according to IRRI, and has since fluctuated by 25-30 as the global rice trade has tripled, from 11 to 33 million tonnes in the wake of trade liberalization.

Although Thailand remains the world’s premier producer, it’s questionable if they can remain that way, IRRI’s Mohanty said. Thai rice has traditionally been the world’s high-quality standard. But as Thai farmers figure out that the government will buy all the rice they can grow, the farmers can be expected to drive up yields any way they can, which risks damaging quality.

In the meantime, other countries are catching up to Thailand. Vietnam and India are both major producers and exporters. Myanmar may not be far behind. Prior to the country’s disastrous six-decade experiment with socialism and self-sufficiency, Burma, as it was then known, was known as the breadbasket of Asia. If it can get its act together, it could return to that position. The Philippines, which has spent decades as the world’s biggest rice buyer, has introduced programs to improve rural infrastructure and provide other aid to rice farmers, cutting substantially into the amount of rice the country must buy.

“If Thailand persists with the program, the emergence of new players in the export market will surely accelerate,” IRRI said in a report earlier this year. “The country may be displaced eventually as the largest exporter in the world. But, 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. Hence, Thailand will continue to hold on to the top position.”