Government intervention in the rice market?
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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When does agricultural price stabilisation policy turn into agricultural subsidies?
Today's article helps you answer this question.
First, this introduction will provide a summary of the article, the overall big picture of government rice policy over the last two years, then as you read the details in the article, you can match these details with the big picture.
Alternatively, ignore the introduction and write a summary of your own and check it against this summary to see if we reach the same conclusions. Your summary should distinguish between subsidies which the public pays a lot for through taxes and price stabilisation which should cost a lot less, roughly what insurance that guarantees a fixed price would cost.
Today's article talks about rice mortgages a lot, so it is important to understand what these are.
As part of its agricultural policy the Thai government has a rice pledging program "under which farmers mortgage their rice when market price is low until such time as it returns to normal." (Source)
The original intent of the rice pledging program was price stabilisation, to smooth over market prices, and eliminate risk to the farmer from the volatility of market agricultural prices.
You can visualise prices going up and down, sometimes above the average and sometimes below the average.
If the price that the government provides farmers in their rice mortgage is set at the average level then the goal of price stabilisation should be achieved. Farmers are protected from price fluctuations and the government doesn't lose any money.
However, if the mortgage price that the government provides farmers is set too high, prices will obviously never reach this high level and the government will have to sell the rice for a loss, effectively subsidising farmers. The government is adding a premium to the long-run average price that farmers would have received for their rice.
Agricultural subsidies are quite common in advanced industrial countries like the United States or the European Union. In fact, these subsidies are what led to the failure of the DOHA development round of World Trade Organisation (WTO) talks.
Agricultural subsidies work as a redistribution of income to the rural farming sector from non-farming sectors. To what extent do poorer farmers receive this subsidy is a question that has to be asked.
To the extent that agricultural subsidies were provided to the rural poor by the Thaksin government and not by previous governments, just like the 30 baht health scheme, these subsidies may have won rural votes in democratic elections. In other words, agricultural subsidies may have been a vote winning populist policy, a kind of policy that even political parties in advanced industrial countries use to win votes.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Who paid for the previous government's intervention in the rice markets?
How much did they pay?
2. After government intervention, how much rice remains in government warehouses?
3. What percentage of the intervention costs were in 2004 versus 2005?
4. Why were the costs of invervention greater in 2004?
5. For how many months during the year did the government offer higher prices?
6. Why did so much rise remain in the hands of the government when the three month intervention period was finished?
7. Did many companies won contracts to buy rice from the Commerce Ministry?
8. Were there any irregularities in PAT's contracts with the Commerce Ministry?
9. How will the intervention price be set for 2006?
What will the likely effect of this price be?
10. When will the period of government intervention in the rice market run?
11. What will the impact of this year's rice intervention be on farmers compared to previous years?
12. How might rice farmers' incomes be maintained?
Bangkok Post Article: October 27, 2006
Rice scheme caused debt and stockpile
Government should compensate farmers PHUSADEE ARUNMAS & CHATRUDEE THEPARATThe previous government's rice intervention programme cost taxpayers more than 18 billion baht and left a stockpile of 3.7 million tonnes of rice in state hands. The loss accumulated from the programme that offered mortgage paddy at prices higher than the global market during the 2004-05 and 2005-06 crop years, according to the Rice Policy Committee.
Deputy Prime Minister M.R. Pridiyathorn Devakula, who chairs the committee, said the government would probably earmark a budget to clear the 18- billion-baht debt, which was owed to the state-run farm assistance programme.The losses, comprising 10.47 billion baht in the 2004-05 crop year and 7.8 billion baht the next year, also include storage expenses and interest.
The heaviest losses were from the 2004-05 crop year, when the government offered to pay farmers who pledged their rice to the government a price 20% to 30% higher than the market value. Then-commerce minister Watana Muangsook proposed mortgage prices for fragrant paddy at 9,700 to 10,000 baht per tonne, compared with market prices of 6,200 to 6,600 baht.
After the three-month period of the annual intervention plan, paddy prices remained low at 6,700 to 7,999 baht a tonne. Farmers mortgaged more than six million tonnes of paddy to the programme.
''It resulted in a large amount of paddy in the hands of the state, because the market prices were not attractive enough for farmers to redeem their mortgage grains,'' M.R. Pridiyathorn said after the first meeting of the committee yesterday.
A similar incident occurred in the 2005-06 season when the state held more than 13 million tonnes of paddy. More than 70% was sold, leaving the current supplies at about 3.7 million tonnes.
M.R. Pridiyathorn has noted that during the past two years, the Commerce Ministry sold 4.22 million tonnes of rice to a single company.
The committee revealed only the company's initials - PAT - although many people understand the letters refer to President Agri Trading Co, a major rice exporter that won nearly all the tenders offered by the ministry.
The Democrat party, which sat in opposition for the past six years, called a no-confidence debate after allegations surfaced that the ministry waived fines for the company when it could not meet the bid terms.
Even though no irregularities had been found on the contracts so far, M.R. Pridiyathorn said yesterday that such a monopoly would be changed.
He added that the committee planned to set an intervention price for 2006-07 crop at a level closer to market prices by using prices from the past three years as a benchmark.
The average price for fragrant paddy in the past three years is 8,700 to 9,000 baht per tonne, and 6,100 to 6,500 baht for white paddy rice. The intervention plan this year will run from the start of next month through Feb 28, with a target to pledge nine million tonnes of paddy.
Local rice exporters have praised the lower prices, saying they would help boost the competitiveness of Thai rice, as export prices would not be too high.
Chookiat Ophaswongse, president of the Rice Exporters Association, believed that rice exports could reach eight million tonnes this year, up from 7.5 million estimated in 2006.
He added that since farmers would obtain lower earnings, the government should offer other assistance to them to boost their incomes.
Vocabulary
compensate - do something to make a bad situation better
intervention - become involved in a situation and try to change it
stockpile - store large amounts of something like food for future use (for example there is an disaster and no food)
a mortgage - agreeing to hand over property to someone who lends you money if you do not pay the money back, a pledge of property to a creditor as security for the payment of a debt.
creditor - lender, person loaning money
debtor - borrower, person borrowing money
security for a loan - the property handed over if loaned money is not paid back
mortgage paddy - the security for the money the government gave the farmers in the rice pledging program
earmark a budget - reserve money in the budget for a special purpose
mortgage prices - the above market price that the government provided farmers in the rice pledging program
fragrant paddy - Jasmine rice, a long-grain variety of rice that has a nutty aroma and subtle flavor (See Wikipedia on Jasmine rice)
redeem their mortgage grains - under the rice pledging program, in theory when the market price of rice returns to normal which should be equal to the mortgage price, the farmers pays the loan back and takes the rice that they pledged back
no-confidence debate - the debate that follows a parliamentary "no confidence motion" put before parliament by the opposition to defeating or embarrass a government (See Wikipedia on no confidence motion)
waived fines - says they don't have to pay the fines
meet the bid terms -
irregularities - actions that violated rules or laws
a benchmark - something of known quality of quantity that is used as a standard to comparison and measurement
pledge - promise to give something
boost competiveness - do things, like make policy, to make producers more competitive
Answer Key:
1. Who paid for the previous government's intervention in the rice markets?
How much did they pay?
Taxpayers paid 18 billion baht.
2. After government intervention, how much rice remains in government warehouses?
3.7 million tonnes.
3. What percentage of the intervention costs were in 2004 versus 2005?
58% were in 2004 and 43% were in 2004.
[10.47/18 and 7.8/10, note that there must be a slight error in the figures since they don't add to 100%]
4. Why were the costs of invervention greater in 2004?
Because the price that the government offered was a lot greater than market price.
("the government offered to pay farmers who pledged
their rice to the government a price 20% to 30% higher than the market value.")
5. For how many months during the year did the government offer higher prices?
Three months.
6. Why did so much rise remain in the hands of the government when the three month intervention period was finished?
Market prices were not high enough for farmers to redeem the rice they had mortgaged to the government during the intervention period.
7. Did many companies won contracts to buy rice from the Commerce Ministry?
One company named PAT.
8. Were there any irregularities in PAT's contracts with the Commerce Ministry?
Investigators are not sure yet.
The Democrat party made allegations that PAT had to pay fines when these bid terms were not met
and that these fines were waived by the Commerce Ministry.
However, no irregularities have been found in the contracts yet.
9. How will the intervention price be set for 2006?
What will the likely effect of this price be?
The intervention price will try to approximate market prices by using prices from the previous three years
to estimate future market prices.
If the intervention price is nearer market prices then
the goal of price stabilisation, and not agricultural subsidies, will be met.
10. When will the period of government intervention in the rice market run?
From November through the end of February.
(Note this is four months, not three months.)
11. What will the impact of this year's rice intervention be on farmers compared to previous years?
Farmers will earn less because the price offered for their rice by the government will be less.
There will be no subsidies.
12. How might rice farmers' incomes be maintained?
Direct monetary assistance "to boost their incomes."
If the goal is to redistribute money to farmers then this makes more sense than distorting market prices.
