Thailand's Rice Mortgage Program

The Thai parliament recently approved a paddy pledging program that will increase the minimum guaranteed price for farmers by more than 60 percent. Since Thailand is the largest rice exporter in the world, accounting for one-third of total global rice trade, one would have expected some serious turmoil in the global market at least in the short term as a result.

Indeed, the global market price for rice has already moved up by more than 15 percent in the past few months in anticipation of this program. But the market reaction to the actual approval of this program by the Thai government has been more or less subdued because of the lifting of the four-year-old export ban on non-basmati rice by the Indian government. Indian rice traders are now allowed to export up to 2 million metric tons of non-basmati rice under Open General Licenses. Both higher price quotations from Thai and Vietnamese traders and a weaker rupee, which has depreciated by 15 percent in the past few weeks, are helping Indian traders in racking up export sales in a hurry.

The paddy pledging program will encourage Thai farmers to plant fence to fence and take advantage of a higher support price by intensifying rice production. The support price, which is much higher than the current market price, will also act as a floor for the domestic and export market, with Thai consumers paying more for their rice. This is likely to have some negative effect on domestic rice consumption, which has already been on a downtrend because of diversification away from rice to more high-value products with a rise in income.

Thus, the pledging program may result in higher production and lower domestic consumption and a larger exportable surplus than what would have been possible without the program. The impacts of this program on the global rice market will depend on how the Thai government handles the surplus rice. This price support program will greatly expand the government’s involvement in the rice trade, thus causing more uncertainty in the global rice market.

With respect to surplus rice, the Thai government has two options. First, it may decide to export the amount that can be sold at a price that will cover its costs. But this will result in stockpiling of rice in Thailand over time similar to what we witnessed in the United States and the European Union in the 1970s and early 1980s. In that case, the Thai government will have to manage the problem of rising public stocks by introducing some measures to control supply.

The second option could be to aggressively sell the surplus rice in foreign markets at a subsidized price. This would cost Thai taxpayers billions of dollars and the actual amount would vary from year to year depending on the global supply and demand situation. If Thailand follows the second option, one would expect global rice prices to be lower than what they would have been in the absence of the Thai pledging program.

If Thailand follows the first option and limits its exports to the amount that can be sold without subsidies and implements measures to control supply to tackle the surplus problem, this could drive up rice prices in the global market. However, higher prices would also induce a greater supply from the rest of the world and moderate the effect on rice prices and it might even bring rice prices close to the level that would have been witnessed without the Thai pledging program. On the bright side, this process could provide an opportunity for countries with abundant land and water, such as Cambodia, Myanmar, and Brazil, to emerge as alternate suppliers to the global rice market.

From a long-term global food security perspective, the emergence of new exporters in the global rice market is definitely a plus and this could provide the much-needed stability to the market during crunch time. The transformation of the global rice market with multiple suppliers could also reassure importing countries that depend on foreign rice for domestic food security.

From Thailand’s perspective, the majority of the benefits of this program will go to large farmers with a marketable surplus, whereas small and marginal subsistence farmers may not benefit much from the program and may even lose if higher rice prices drive up input prices. This will also make rice more expensive in the domestic market. Overall, the implementation of this program may cost Thailand billions and potentially change Thailand's dominance in the global rice market.

(Dr Samarendu Mohanty is the chief economist for the International Rice Research Institute in the Philippines. This appeared first in his blog.)