Thai rice subsidy scheme backfires

Agricultural , China , Commodities , Rice , Thailand Feb 18, 2014 No Comments

RiceThe controversial rice subsidy scheme, which paid farmers up to 50 percent above market rates, helped propel Thailand’s prime minister Yingluck Shinawatra to power in 2011, but now appears to be unraveling as global cereal prices are likely to fall further. From the end of February, the Thai government will cease to purchase rice from farmers.

More than just savvy populist politics, the idea was pitched to the nation as a neat win-win. Not only would down-and-out rice farmers earn more, but the government would corner the rice market and drive up the global price. The promise amounted to a hedge fund-style high-stakes bet with borrowed cash.

Now, hundreds of farmers have protested recently in Bangkok to demand payment after the government ran short of cash to buy their pledged crops late last year, adding to pressure on Yingluck, who has faced months of opposition rallies.

Thailand sought to recoup the money paid to farmers by hoarding rice to drive up prices on world markets, but the plan backfired after rival producers, including India and Vietnam, unexpectedly boosted their shipments, leaving Thailand struggling to find buyers. In the more than two years the scheme has been in effect, Thailand has dropped from the world’s top exporter of rice to third, with an estimated 18-20 million tons of rice stockpiled across the country.

In a further blow to the scheme and her party’s stability, Thailand’s anti-corruption agency is investigating the money-guzzling subsidy programThailand’s National Anti-Corruption Commission (NACC) said last week it expects to file formal charges later this month against Yingluck for her role in the rice scheme while an NACC panel has already brought formal corruption charges against 15 people involved in government-to-government rice deals. Those allegations prompted China to cancel a deal to buy 1.2 million tons of Thai rice.

The populist rice scheme has long been criticised by economists locally and internationally for distorting the market, sucking huge sums out of the national budget and being prone to corruption. Still, all governments, including the current lame-duck administration and its predecessors, have resorted to politically juicy subsidy programmes.

“The program is simply unsustainable and hurting the finances of the country,” said Concepcion Calpe, a senior economist in Rome for the United Nations’ Food & Agriculture Organization. “The suspension of the rice-pledging program will exacerbate the decline in Thai market prices as farmers enrolled in the program increasingly fail to be paid.”

The government spent 689 billion baht ($21 billion) in the past two crop years buying from farmers at prices that were as much as 76 percent higher than current market rates. The USDA expects that Thai inventories will reach a record 14.7 million tons this year, compared with 6.1 million in 2010.

“In the worst case, if they decide to get rid of the program and go back to the time when there was no mortgage scheme, it will put downward pressure on global prices,” said Samarendu Mohanty, senior economist at the Los Banos, Philippine-based International Rice Research Institute.

A further drop in rice prices would help extend a decline in global food costs, which fell in January to a 19-month low amid ample supplies, according to a 55-item gauge compiled by the FAO. The measure is down 15 percent since touching a record in February 2011, and cereal prices tracked by the FAO lost 26 percent since September 2012. Rough-rice futures in Chicago fell 0.8 percent to $15.53 per 100 pounds in the past year.


Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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