Thailand's Growing Rice Predicament

By John Berthelsen 6 September 2012

The dimensions of Thailand’s rice dilemma started to come clear earlier this week when the government put 763,856 metric ton of rice on the market at an average of US $547 per ton, but sold less than a third of what it put up for auction—just 232,000 tons. What started as an economic miscue looks increasingly like turning into a political predicament.

Thailand’s Commerce Ministry said most bids were too low, despite the government’s earlier indications that the auction would complete regardless of prices. Speaking about the rice that was sold, an official at the Department of Foreign Trade said, “The approved prices are in line with market levels and are above benchmark rates.”

The government is expected to open another auction before the end of September to seek to sell another 700,000 tons in the face of falling prices. That leaves Prime Minister Yingluck Shinawatra’s Pheu Thai government with an estimated 10 million tons of rice and no place to sell it. Reportedly the government is seeking some government-to-government transaction.

On Aug. 29, a year after Pheu Thai introduced its controversial rice subsidy program, in which it said it would pay Thai farmers a 50 percent premium over global prices, Asia Sentinel reported that the policy has cut three million tons from Thailand’s 2011 exports, resulting in the possible loss of its position as the global leader in rice production and added millions of tons to government warehouses.

The big question is when a failed economic policy turns into a real political policy. If Thailand has 10 million tons of unsellable rice in government warehouses, as it appears the country does, that means it has paid the equivalent of $5.47 billion to keep its eight million rice farmers happy. It must now find a way to get rid of that stockpile. If they cannot move it, and it is not stored in proper conditions, it will start to rot.

If the country puts large amounts onto an already-glutted world market, that would drive the price down further. Global rice on Aug. 23 was selling at $580 per ton, 44.1 percent below its cyclical high and 0.3 percent below a year ago according to the United States Department of Agriculture. Commodities analysts are predicting that the global price of rice will continue to fall, perhaps to $550 per ton.

The country has led global rice exports in the world for nearly five decades, with volumes increasing steadily from one million tons 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 of total global exports at a period when the global rice trade tripled, from 11 million to 33 million tons. China, the United States and Malaysia have traditionally been the biggest importers of Thai jasmine rice.

Lourdes Adriano, a lead agriculture sector economist with the Asian Development Bank, said on Tuesday during a conference call on global food prices that Thailand’s rice pledging program has taken a net three million tons of rice off the world market and would have caused global prices to have “jacked up steeply were it not for India’s decision to remove export controls on non-Basmati rice.”

That is because initially, introduction of the Thai price supports caused the global price of rice to spike upwards by 25 percent to near $600 per ton 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 governments.

An attempt to remove fuel subsidies played a role in the downfall of the government of then-Prime Minister Abdullah Ahmad Badawi in Malaysia in 2008. Indonesia earlier this year had to back away from reducing fuel subsidies by 33.3 percent in the face of rising public protest.

Accordingly, on Tuesday it was reported that the Thai government plans to announce another budgetary allocation for the rice pledging program, making it questionable how long it can go on buying rice without being able to sell the accumulated stocks before the Thai economy starts to suffer.

The country’s rice milling and other export operations, which depend on global trade, are already suffering. The bigger question is how long the government can go on diverting funds into rice purchases when infrastructure spending, particularly for a $11.7 billion program of flood relief made necessary by the 2011 floods that devastated a huge area of the country.