Thursday, April 19, 2012

Thailand's Ill-Advised Rice Subsidy Program

Increasing the subsidy the government pays to farmers is pricing exporters out of global markets

Thailand may be about to about to lose its pre-eminent position as the world’s biggest rice exporter because of an ill-advised policy on the part of the incoming Pheu Thai government in 2011, when it promised to raise the price the government pays farmers by almost 50 percent.

The result was that the rice pledging scheme, as it is known, caused farmers to increase their plantings exponentially – “from fence to fence,” as one economist said. Rice occupies 55 percent of Thailand's arable land. Nearly 7 million tonnes of rice entered the scheme between October 2011 and February 2012 despite devastating floods that inundated much of central Thailand and caused significant crop losses.

However, as forecast in Asia Sentinel in September 2011, the scheme has priced Thai exporters out of overseas markets. Global prices have remained low, according to Dr Samarendu Mohanty, an economist with the International Rice Research Institute in Los Banos, Philippines.

“Everybody was predicting that the Thai market program would cause lots of problems in the market,” Mohanty said. “That hasn’t happened because there has been a surplus of rice in the world market. We have too much rice.” Introduction of the Thai support scheme caused the price of 25 percent broken rice to spike up to nearly US$600 per tonne before drifting down this year again.

The Thai government especially has too much rice. The program was extended from the end of February to September to cover procurement of the second crop and keep farmers happy, with the result that the government can be expected to end up with having to purchase as much as 10 to 12 million tonnes of surplus rice at least US$100 per tonne over world prices.

“When everything is said and done, it will become an issue of how long they want to hold onto it,” Mohanty told Asia Sentinel in a telephone interview. “The government will become active to dispose of some of it. They have to have some kind of government-to-government deal to sell at subsidized prices.”

Given ample current world stocks, it appears that Thailand will face selling at a loss. India, which is becoming a powerhouse n international rice sales, expects a normal 2012 monsoon, producing some 30 million tonnes, much of which will be used to support domestic food subsidy programs that supply 35 kg of rice per month to some 65 million of the country’s poor families. Given that, “Thailand will not be able to sell above their market price,” Mohanty said. “It will have to be subsidized.”

Thailand has been the 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 25 percent and 30 as the global rice trade has tripled, from 11 to 33 million tonnes in the wake of trade liberalization and the 1994 General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organization.

Rice, traditionally grown in small plots by families raising their own food, has gradually grown to be a globally traded commodity, with volumes increasing more than 50 percent in the past decade. Vietnam and India in particular have joined global exporters, today accounting for nearly a third of the global rice trade.

Despite losing market share, Thailand has been able to steadily increase its volume of exports and maintain its status as the largest exporter in the world. The United States Department of Agriculture (USDA) now projects Thailand’s 2011-12 crop at 20.3 million tonnes of milled rice, more or less matching 2010-2011 production.

India’s entry into the non-basmati export market, after four years has made matters worse for Thai exporters. Thai white and parboiled rice prices were nearly US$200 per tonne than for their Indian counterparts during the initial months after India's resumption of non-basmati rice exports, according to IRRI.

Although the price difference has narrowed as Thai prices have declined, it still remains around US$100 per tonne. Vietnam also lost some market share because quotations closely follow Thai prices. The USDA now projects Indian rice exports for 2011-12 to be 6.5 million tons, which is the same as the projected exports from both Thailand and Vietnam in the same marketing year. This is nearly 40 percent lower than what Thailand exported in 2010-11: 10.5 million tons, IRRI said.

“Is this the end of the dominance of Thailand in the global rice market?” an article asked in IRRI’s house publication, Rice Today. “The answer to this question is not a categorical yes or no. It depends on developments on several fronts.

Thailand must disband its pledging program to remain on top for the immediate future. But, the article continued, “Its stay on top may be short-lived if Myanmar and Cambodia get their act together and modernize their rice sector and reform their policies. Both of these countries are endowed with fertile lands and a favorable natural environment that can expand their production and take away market share from Thailand.”

Myanmar’s steps to reform its government and open up its economy are especially meaningful. Prior to the country’s disastrous five-decade experiment with socialism and self-sufficiency, Burma, as it was then known, was described as the breadbasket of Asia. If it can get its act together, it could return to that position.

“Several government initiatives, which aimed to improve the performance of its rice sector for the past years have raised hope for Myanmar’s return to the global rice market sooner,” IRRI notes. “One of these initiatives is the establishment of the Myanmar Rice Industry Association (MRIA) in 2010 by merging producers, traders, and millers associations. It aims to speed up the development of the sector by attracting private investment and raising the sector’s concerns to the government.

“If Thailand persists with the program, the emergence of new players in the export market will surely accelerate,” IRRI said. “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. Asia Sentinel

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