Governments Farmer-Friendly Rice Subsidy Backfires

Few buyers willing to pay extra for Thai rice, the government has over 18 million tons in warehouses

 

BANGKOK – Until last year, business was good for Charoen Laothamatas, the president of Thai rice exporter Uthai Produce. With Thailand dominating the global market for rice exports, Uthai enjoyed strong demand. In 2012, though, Charoen had to cut his workforce by 40 percent. The culprit: a Thai government policy that pays local farmers vastly inflated prices for their rice. While the government sees the program as a way to boost rural incomes, the policy has made Thai rice uncompetitive against rice from Vietnam and India. Before the new policy went into effect, Uthai exported 200,000 tons to the U.S., China, and Hong Kong. This year, he says, “we will be lucky if we get 80,000.”

Harvested and dried rice is loaded onto a truck at the Sahakorn Kan Kasert rice mill in Suphan Buri, Thailand

Charoen’s troubles are related to the political challenges the kingdom has endured since a military coup ousted populist Prime Minister Thaksin Shinawatra in 2006. The current premier is his sister, Yingluck Shinawatra, and in 2011 she decided an easy way to cement her party’s grip on power was to win over farmers by paying above-market prices for their rice. “I earn more and have higher savings thanks to the program,” says Groon To-Chai, a 67-year-old farmer from Nakon Sawan province in central Thailand who says his monthly income has jumped by 50 percent, to 30,000 baht ($1,000). At $571 per metric ton, Thai rice is now much more expensive than Vietnamese and Indian rice.

Thailand’s private exporters either have to buy rice from the government at the inflated price or go directly to farmers, who for obvious reasons prefer selling to the government. Because of the artificially high price, Thai rice exports in 2012 fell 37 percent, according to Thailand’s Ministry of Commerce. Exports for the first 14 weeks of 2013 were down 13.3 percent compared with a year earlier, says the Thai Rice Exporters Association. “We are suffering, and we continue to suffer,” says Korbsook Iamsuri, president of the association.

Thai rice exports in 2012 fell 37 percent, according to Thailand’s Ministry of Commerce

With few buyers willing to pay extra for Thai rice, the government has over 18 million tons in warehouses, according to the UN’s Food and Agriculture Department. “Normally you can keep rice up to one year, and after that the quality starts to go bad,” says Kiattisak Kanlayasirivat, a director in Bangkok with Novel Commodities. After two years, the quality falls by 50 percent. “The grain will become yellow, and some will be spoiled because of insects,” he says.

Commerce Minister Boonsong Teriyapirom told reporters on April 5 that the government plans to sell up to 7 million tons of rice this year. The proceeds from those sales, plus sales from state stockpiles, should bring in 180 billion baht.

Rather than sell the rice on the open market—and risk embarrassment as private dealers see the haircut the government is taking—Thailand is trying government-to-government deals that allow buyer and seller to keep prices secret. On April 15 the Ivory Coast’s Commerce Ministry said it had bought “various qualities” of Thai rice at “competitive and stable” prices. Four months after the 38,500 tons arrived, however, the Ivorian government has had to trash 7,600 tons because of quality problems, according to an official at the Commerce Ministry. Eighty percent of the rice still sits in warehouses. The Ivorian government aims to sell it to wholesalers, says the Commerce official, who refuses to be named because he’s not allowed to talk to the press.

The Thais are selling into a soft market. “There is just no demand for this rice,” says Jac Luyendijk, CEO of SAT Swiss Agri-Trading. “You have to dump it.” Swiss Agri-Trading now buys about 30,000 tons of Thai rice, down from about 200,000 tons before 2011.

Indian rice has flooded the market

When Yingluck first announced plans to increase prices, Thailand didn’t have to compete against India, the second-largest rice producer, since the New Delhi government had banned overseas sales after a global shortage in 2008. The Indians lifted the ban in 2011. Since then, Indian rice has flooded the market. After a record year in 2012, Indian exports are likely to grow another 5 percent this year, according to a survey of estimates by Bloomberg. Thailand needs to cut “at least $100 [per metric ton] from the price they are quoting right now,” says Samarendu Mohanty, head of the social sciences division at the International Rice Research Institute in Manila.

Yingluck’s Cabinet last month approved plans to spend another 100 billion baht to buy rice from farmers. The government puts its overall losses at 80 billion baht, but Korn Chatikavanij, deputy leader of the opposition Democrat Party and former finance minister, says the loss for the first year alone was 200 billion baht. “It’s a disaster,” he says. “We shot ourselves in the foot.”

If Thailand doesn’t cut export prices, it won’t find buyers. But if it slashes prices, the U.S. and other countries might ask the World Trade Organization to impose anti-dumping penalties. Already, the U.S. government has alerted the WTO of its concern about Thai dumping. “If [the WTO] becomes a problem, then we are up a creek,” says Korn. “We would be stuck with rice 40 percent above-market that we couldn’t sell.” A quick fix will probably elude the Thais. “We are in uncharted territory,” says Swiss trader Luyendijk, who predicts three years of depressed global prices. “We have never seen an example of such large stocks of rice in any country.” Uthai Produce’s Charoen worries about the long-term damage. “It takes years to build up a rice exporting industry,” he says. “Now we see it going down the drain.”

The bottom line: The Thai government is sitting on a loss of at least 80 billion baht because of the generous price it’s paying Thai farmers for rice.