Government financial aid for rice mills too?
Wasn't it just farmers in need?
By Jon Fernquest[Introduction|Article]
[Reading Questions|Answers]
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The rice-mortgage programme of the Thai government is complex and controversial. Its use as a vote-getting "populist" programme pre-dates the Thaksin administration. Subsidized rice prices, high profile rice thefts from warehouses, and questions about who really benefits from the rice mortgage programme, farmers or rice millers, all arose as major issues after the coup.
The interim government is trying to make things more transparent, to make it clearer who is being subsidised, rice millers or farmers, and for how much. That's what today's article is about. It's not the first article on this subject though. For previous Bangkok Post articles on this topic and agriculture in general please see the archives.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. During what part of the year is the rice-mortgage programme effective? For most of Thailand? For the south?
2. What does the rice-mortgage programme do to prices in rice markets?
3. Which group of people is it the goal of the rice-mortgage programme to assist?
4. Do farmers pledge most of the rice in the rice-mortgage programme?
5. Who bears most of the financial burden of subsidies under the programme? Why?
(Use inference)
6. Are farmers the only people allowed to pledge rice in the rice-mortgage programme?
7. What do rice mills do with their pledged rice before the due date for turning it over to the government arrives?
8. Can price supports for farmers co-exist with rice mill trading of pledged BAAC rice?
9. Is money taken from farmers being used to finance rice mill trading of rice? If so, is this bad?
10. Where should the money used to help rice mills come from?
11. Why did BAAC's non-performing loans (NPLs) increase this year?
12. Are BAAC NPL problems likely to get better or worse in the near term? Why?
13. How long does BAAC have to adjust to changes in accounting for NPLs?
14. Why are tbe new IAS 39 accounting standards being adopted?
(Outside research required)
15. Is the high level of NPLs at BAAC due to the rice-mortgage programme under the Thaksin administration?
(Outside research required)
Bangkok Post Article November 05, 2007
AGRIBUSINESS / SUBSIDIES & BRANDINGBAAC urges elimination of rice mortgages by millers
Programme does little to help support pricesWICHIT CHANTANUSORNSIRI
Thailand should stop offering mortgages for rice from millers as the practice does little to support market prices, according to Teerapong Tungteerasunun, the president of the Bank of Agricultural and Agricultural Co-operatives (BAAC).
The 2007-08 rice-mortgage programme started this month and runs until the end of February. For the southern provinces, the programme is effective from February to May 2008.
The programme, which helps set an effective price floor and is aimed at assisting local farmers, has a target to accept pledges of eight million tonnes of rice paddy at an estimated cost of 10 to 20 billion baht.
But Mr Teerapong noted that 80% of the rice pledged under the programme was typically made by rice mills.
At the same time, the state-owned BAAC has been forced to bear ever-increasing liabilities from the programme, with outstanding debt owed by the government of 60 billion baht, due largely to excessively high pledging prices set under the Thaksin Shinawatra government.
mortgages - borrowing money by offering something as a guarantee to be taken if you do not repay the loan
a rice-mortgage - when a farmer pledges (promises) to hand over rice on a certain date in the future in exchange for cash now (at a price much higher than the market price, at least under the Thaksin administration)
Bank of Agricultural and Agricultural Co-operatives (BAAC) - the main government bank involved in loaning to farmers
set an effective price floor - create a price level that constantly moving market prices cannot go below
a target - a goal to achieve
pledges - rice promised to be handed over in the future
rice paddy - unprocessed rice
rice mills - factories where rice is processed
bear liabilities - debt increasing (without assets to offset them, being the implication)
outstanding debt - loan money that has not been paid back yet
pledging prices - the price that a farmer or mill receives for the rice they promise to hand over in the future
Rice Mortgage Programme for both Farmers and Rice Mills
The rice-mortgage programme accepts rice from two sources, farmers and rice mills. Farmers can pledge their paddy with the BAAC in return for cash and a contract stipulating either repayment or forfeiture of the rice at the end of the programme.
Rice mills can similarly mortgage their stock with the BAAC for working capital. In this case, the Public Warehouse Organisation is responsible for inspecting rice stocks pledged under the programme.
A mill would typically trade rice held in inventory throughout the year, but must be able to show that the rice pledged to the BAAC is available on the due date of the contract in the amounts and quality stipulated.
stipulating x - that has the condition x
forfeiture - something taken away (not given back)
working capital - money available for immediate use in a business, to pay salaries for instance (versus money tied up in equipment, machines, or real estate)
Public Warehouse Organisation (PWO) - the Thai government organisation that supervises the storage of rice in the rice-mortgage programme
Financial Aid for Rice Mills too? Why?
Experts say this practice, under which rice that has been pledged to the BAAC is still traded in the market, undermines the broader policy of helping prop up market prices to benefit farmers.
Mr Teerapong said it would be more effective if the rice-mortgage programme was limited to accepting stocks from farmers.
State financial assistance for rice mills, meanwhile, should be transformed into a more direct system, such as through offering packing credits for operators rather than indirect assistance using BAAC funds, which in part represent deposits taken from farmers.
"We need to use our money correctly. Farmers deposit their money with [the BAAC]. Under the current system, I need to use their deposits to finance the mortgage programme for them," Mr Teerapong said. "The country's money is with the Budget Bureau. If [helping mills] is part of the national agenda, then it should be financed from the national budget."
undermine a policy - make a policy less effective (or ruin it entirely)
prop up - support, keep from falling, keep high
effective -
credits - money added to an account
operators - companies actively involved in a certain business
the national agenda - important policies for the whole country
Non-Performing Loans at the BAAC
Mr Teerapong added that the BAAC this year had seen a slight increase in non-performing loans in line with the slowing economy.
"We are trying to maintain or reduce our non-performing loans, now at 4.5% of total loans," he said.
But the adoption of the new IAS 39 accounting standard at the end of the year would cause the BAAC's non-performing loan portfolio to jump to around 10% of total loans, due to stiffer classification and provisioning requirements.
The bank's existing loss provisions of 10 billion baht cover its non-performing loans based on existing standards. Under IAS 39, Mr Teerapong said the bank would need to set aside another 10 billion baht, expected to be fully set aside within the next three years.
Non-Performing Loans (NPLs) - loans not being paid back any longer, loans in default
adoption of - begin to use
IAS 39 accounting standard - international accounting standards for dealing with NPLs
stiffer - stricter
set aside - do not use, keep for a special purpose
loss provisions - money that the bank sets asides
Answer Key:
1. During what part of the year is the rice-mortgage programme effective? For most of Thailand? For the south?
a. For most of the country: November to February.
b. For the South: February to May.
2. What does the rice-mortgage programme do to prices in rice markets?
It sets an effective price floor in rice markets.
3. Which group of people is it the goal of the rice-mortgage programme to assist?
Farmers.
4. Do farmers pledge most of the rice in the rice-mortgage programme?
No, rice mills do.
Rice mills pledge 80% of the rice in the programme.
5. Who bears most of the financial burden of subsidies under the programme? Why?
(Use inference)
a. The Thai government bears the financial burden through its ownership of Bank of Agricultural and Agricultural Co-operatives (BAAC).
b. It has accrued liabilities as a result of "excessively high pledging prices set under the Thaksin Shinawatra government."
("At the same time, the state-owned BAAC has been forced to bear ever-increasing liabilities from the programme, with outstanding debt owed by the government of 60 billion baht, due largely to excessively high pledging prices set under the Thaksin Shinawatra government.")
6. Are farmers the only people allowed to pledge rice in the rice-mortgage programme?
No, rice mills also pledge rice in the programme.
7. What do rice mills do with their pledged rice before the due date for turning it over to the government arrives?
They trade the rice on the market for a profit.
8. Can price supports for farmers co-exist with rice mill trading of pledged BAAC rice?
No, not according to experts. Determining exactly why some experts hold this to be true would be a good research project.
9. Is money taken from farmers being used to finance rice mill trading of rice? If so, is this bad?
That money is being taken from farmers and being used to finance rice mill trading of rice does seem to be the implication,
and on the surface this does seem to be bad, but no deep explanation of why this is bad is given.
("State financial assistance for rice mills, meanwhile, should be transformed into a more direct system, such as through offering packing credits for operators rather than indirect assistance using BAAC funds, which in part represent deposits taken from farmers.")
10. Where should the money used to help rice mills come from?
From the national budget after explicit provision is made for it is made as part of national policy.
Any subsidies should be made transparent.
("We need to use our money correctly. Farmers deposit their money with [the BAAC]. Under the current system, I need to use their deposits to finance the mortgage programme for them," Mr Teerapong said. "The country's money is with the Budget Bureau. If [helping mills] is part of the national agenda, then it should be financed from the national budget.")
11. Why did BAAC's non-performing loans (NPLs) increase this year?
There was a slight increase in NPLs due to the slowing economy.
12. Are BAAC NPL problems likely to get better or worse in the near term? Why?
Worse. The new IAS 39 accounting standards coming into force at the end of the year will cause BAAC's NPLs to jump to around 10% of total loans from the current 4.5%.
13. How long does BAAC have to adjust to changes in accounting for NPLs?
Three years.
14. Why are tbe new IAS 39 accounting standards being adopted?
(Outside research required)
To get bad loans off the accounting books. To write them off quicker.
Every bad loan on the books is money tied up in assets that aren't generating income for the bank.
15. Is the high level of NPLs at BAAC due to the rice-mortgage programme under the Thaksin administration?
(Outside research required)
