LAUNCESTON, Australia: It may be too early to get excited, but there is a glimmer of hope that common sense may prevail in Thailand’s rice intervention, as the program gets less money amid tentative signs stockpiles may be sold at market prices.
Not only has the government granted just 60 percent of the money sought to extend the scheme to pay inflated prices to farmers for their rice, the central bank chairman has also urged for an end to the scheme.
The government has decided to grant 240 billion baht ($7.8 billion) to buy paddy rice from farmers as the main harvest gets underway this month, down from the 405 billion baht the Commerce Ministry initially sought.
Bank of Thailand Chairman Virabongsa Ramangkura said on Wednesday that the country, formerly the world’s biggest exporter of the grain, would be “doomed” if it continued the intervention policy.
Both of these developments are significant as they expose for the first time unease within the government of Prime Minister Yingluck Shinawatra that came to power on the back of populist pledges to help poor farmers.
It’s also worth nothing that Virabongsa was appointed by Yingluck in June and has in the past sided with the government.
While Shinawatra has re-committed to maintaining the scheme, the scaling back of the money budgeted shows there may be a creeping realization that whatever the social and political benefits, it is rapidly becoming too large a drain on the government’s coffers.
The scheme may cost as much as 3.5 percent of annual economic output, while also leaving the Thai government with a mountain of unsold rice as competitors India and Vietnam happily step into the gap left by uncompetitively priced Thai supplies.
Thailand’s stockpiles now amount to about 12 million tons of milled rice, and so far the government has been unsuccessful in selling much, with only one small contract to Ivory Coast confirmed.
Even the scaled-back intervention will allow the government to buy about 15 million tons of paddy at the subsidized price, which will bolster milled rice stocks by about 10 million tons.
It appears that the Finance Ministry is keen for the government to sell some of its rice stockpiles, before it agrees to supporting paying out more money in subsidies.
This would seem to be a more sensible course, but it’s still going to be one that ends up costing the treasury dearly as the rice will have to be sold at a substantial loss.
Paying 15,000 baht a ton for paddy is equivalent to about $730 a ton for milled rice.
The current price for benchmark 100 percent B grade Thai white rice is $590 a ton and the 5 percent broken grade is $574 a ton.
Even though not all paddy fetches the full subsidized price, the government is still facing a loss of about $140 a ton on its stockpiles, and that’s assuming the price remains steady, which it won’t.
It’s far more likely that Thai rice will have to drop at least to the $440-$450 charged by Vietnam and India.
This would result in a loss of almost $300 a ton, which on a stockpile that should grow to more than 20 million tons by the end of the first quarter of 2013, equates to a potential loss of $6 billion.
However, even making a loss is preferable to building up an ever-increasing pile of unsold rice and allowing competitors to steal market share.
Thailand’s exports for the first nine months of the year were 44 percent lower at 4.9 million tons, while Vietnam’s were up 7.1 percent to 6.4 million for the same period and India is on target to export 7 million for the whole of 2012.
Scaling back the amount of money for the intervention shows the Thai government is slowly learning the lesson that market intervention is expensive and rarely works from an economic standpoint.
The next step will be to start selling the grain at a loss and then working out if the perceived social and political benefits are worth the cash cost.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.
Glimmer of hope for common sense in Thai rice scheme
