Reforming agricultural price supports in Thailand
By Jon Fernquest
Government agricultural policy was the
focus in this week's Business Focus section of the Bangkok Post. Three articles were featured (See article #1, #2, #3).
The wonderful diagram below that describes how the government agricultural price support system works was also provided.
Here is a summary of some of the important points made in the article:
1. Agricultural price supports benefit rich farmers with large irrigation systems a lot more than they do poor farmers.
2. Providing social welfare benefits directly to poor farmers would be a more efficient way to deal with the needs of poor farmers.
3. Price support schemes for rice are a potential threat to the long-run competitiveness of Thai rice on international markets.
High pledging prices cause the quality of rice to fall over time according to noted economist Ammar Siamwalla:
According
to Dr Ammar, the pledging scheme, which generally set prices higher
than market rates, aiming primarily for political gain, would be
harmful in the long run, as it addicts
farmers and weakens
their capability to improve rice quality.
He said rice that went to the government was mostly not grain owned by poor farmers but surplus output.
"According to studies, the quality of rice will be mainly determined by the proportion of rice trading by the government. Rice quality has significantly dropped over the last three or four years as the government turns out to be a giant buyer in the market," he said.
"Eventually, we're afraid Thai rice is likely to go for the lower market."
(Source: Bangkok Post, business, 21-11-08, Ammar slams 'corrupt' rice scheme, PHUSADEE ARUNMAS, link)
He said rice that went to the government was mostly not grain owned by poor farmers but surplus output.
"According to studies, the quality of rice will be mainly determined by the proportion of rice trading by the government. Rice quality has significantly dropped over the last three or four years as the government turns out to be a giant buyer in the market," he said.
"Eventually, we're afraid Thai rice is likely to go for the lower market."
(Source: Bangkok Post, business, 21-11-08, Ammar slams 'corrupt' rice scheme, PHUSADEE ARUNMAS, link)
4. Risk management tools such as put options should be used to help farmers manage risk.
5. "Long-term strategies to raise crop yields and productivity" and accelerating investment in research and development of crop varieties and breeds" should be emphasized to "upgrade the competitiveness." (See previous article)
Vocabulary:
price pledging programme, price
support programme - when the government purchases large
quantities of rice at above market prices so as to guarantee farmers a
price for their rice
agricultural price supports - the above market prices set by the government in prioe support programmes
irrigation system - canals and pipes to bring water from rivers and lakes to the fields of farmers (See Wikipedia)
social welfare benefits, welfare benefits - help that the government gives to persons in need, to poor people, disabled people, or people who have lost their job
productivity - the amount of output or production that an economy gets for a given level of inputs such as labour and capital (See The Economist glossary)
efficient (adjective) - wasting little time, energy and resources in doing a task (minimizing time, energy and resources in performing a task) (See glossary)
long-run competitiveness - when consumers continue to buy your product over a long period of time (because they find the quality or price better than other products)
addicts - like a drug addict, someone who cannot do without something bad, cannot using something bad
surplus output - amount produced above what is normally produced
strategies - long-term plans to achieve goals
crop yields - the amount of crops produced per rai of land used
accelerating investment in Y - increasing investment in Y, at a faster and faster pace
Research and Development (R&D) - scientific investigation to develop new consumer goods and services, new inputs into production, new methods of producing goods and services, or new ways of operating and managing organizations (See Wikipedia on research and development and new product development, source for above definition)
upgrade competitiveness - improve competiveness (higher quality or lower price)
agricultural price supports - the above market prices set by the government in prioe support programmes
irrigation system - canals and pipes to bring water from rivers and lakes to the fields of farmers (See Wikipedia)
social welfare benefits, welfare benefits - help that the government gives to persons in need, to poor people, disabled people, or people who have lost their job
productivity - the amount of output or production that an economy gets for a given level of inputs such as labour and capital (See The Economist glossary)
efficient (adjective) - wasting little time, energy and resources in doing a task (minimizing time, energy and resources in performing a task) (See glossary)
long-run competitiveness - when consumers continue to buy your product over a long period of time (because they find the quality or price better than other products)
addicts - like a drug addict, someone who cannot do without something bad, cannot using something bad
surplus output - amount produced above what is normally produced
strategies - long-term plans to achieve goals
crop yields - the amount of crops produced per rai of land used
accelerating investment in Y - increasing investment in Y, at a faster and faster pace
Research and Development (R&D) - scientific investigation to develop new consumer goods and services, new inputs into production, new methods of producing goods and services, or new ways of operating and managing organizations (See Wikipedia on research and development and new product development, source for above definition)
upgrade competitiveness - improve competiveness (higher quality or lower price)
Here is an extract from this week's Bangkok Post article:
Sowing seeds of sustainability
Helping farmers to be more self-reliant will do more than expensive state intervention schemes that benefit mainly big players.By: Phusadee Arunmas and Charoen Kittikanya
20/04/09
...Nipon Paopongsakorn, president of Thailand Development Research Institute (TDRI), says the system has done almost nothing to address the problems of poverty. He says the government could do better by offering farmers social welfare benefits such as free education and medical services.
The price intervention schemes, according to studies, also benefit mostly large-scale farmers in irrigation areas who produce large output, he said.
"The existing price pledging programme is tantamount to helping the well-off farmers, while farmers, notably from the Northeast, enjoy few benefits, as their production is relatively small due to a lack of adequate irrigation systems," he said.
reform - improve
Thailand Development Research Institute (TDRI) - think tank established in 1984 to conduct policy research and disseminate results to the public and private sectors, provides technical and policy analysis that supports the formulation of policies with long-term implications for sustaining social and economic development in Thailand (See website)
price intervention schemes - a government programme to buy and sell in a market to influence the price
scale - size
large-scale - large size
tantamount to - almost the same as
well-off - rich
relatively small - small compared to others
Thailand Development Research Institute (TDRI) - think tank established in 1984 to conduct policy research and disseminate results to the public and private sectors, provides technical and policy analysis that supports the formulation of policies with long-term implications for sustaining social and economic development in Thailand (See website)
price intervention schemes - a government programme to buy and sell in a market to influence the price
scale - size
large-scale - large size
tantamount to - almost the same as
well-off - rich
relatively small - small compared to others
Threat to Thailand's competitiveness
Worse, he said, the pledging programmes with their higher-than-market pledging prices threaten to ruin the competitiveness of Thailand's agriculture sector in the long run."The government's intervention plan, which sets the prices of rice, tapioca and maize higher than the market prices, is a serious mistake, as it will eventually draw massive output into the government's stockpile, costing the government a massive budget," said Mr Nipon.
"Higher-than-market pledging prices will also lead the government to massive losses once it releases its stockpiles, as there is no way that private traders and exporters will buy the products from the pledging scheme at higher prices."
higher-than-market pledging
prices - the government is paying farmers higher than the
market price (price support systems are supposed to be insurance
against short-term price fluctuations but should match long-term market
prices)
competitiveness of agricultural sector - whether price and quality of agricultural products is good enough so that there are buyers on international markets
stockpile - large quantities of goods stored for future use
release its stockpiles - stop storing the stockpiled goods, so that they enter the market
competitiveness of agricultural sector - whether price and quality of agricultural products is good enough so that there are buyers on international markets
stockpile - large quantities of goods stored for future use
release its stockpiles - stop storing the stockpiled goods, so that they enter the market
Price intervention has generally created a two-tier system, with a pledging price on one side and a market price on the other. Traders may wait until the government opens bidding to release its huge rice stockpile. Normally, the winner would get a lower price than the price fixed under the government's subsidy programme.
"The government should not engage in trading itself, as it will never be as smart as the private sector," said Mr Nipon.
"In the present crisis, the state's coffers should be conserved and not squandered on pledging programmes that offer relatively higher prices. This practice is tantamount to destroying the country's agricultural development."
the state's coffers - the
money that the government has available to use
conserved - saved and used wisely
squandered - wasted
X tantamount to Y - X is bad because it is similar to bad thing Y
conserved - saved and used wisely
squandered - wasted
X tantamount to Y - X is bad because it is similar to bad thing Y
Put options to handle risk of price volatility
Dr Nipon believes there is a better way for the government to help farmers plan and manage production and shield themselves from price volatility. He proposes that the Bank for Agriculture and Agricultural Co-operatives take the lead in handling a risk-management mechanism for farmers, particularly through put options.An option programme would give farmers an incentive to hold on to their rice in hopes of benefiting from higher prices in future. This in turn would help reduce pledges under the normal mortgage programme, reducing state stockpiles and helping support market prices by reducing supply distortions.
shield - protect
price volatility - when prices go up and suddenly and unexpectedly
Bank for Agriculture and Agricultural Cooperatives (BAAC) - the Thai government owned bank used for most agricultural lending
risk-management mechanism - a system for protecting against possible harmful events
a derivative - a asset that are built on top of the value of another asset, their value is "derived" from the underlying asset
an option - a type of derivative that gives the right to sell or buy an asset at a particular price before a given date (See Economist glossary)
a put option - the right to sell an asset at a particular price before a given date (See Wikipedia)
incentive - a reward to encourage certain types of behaviour
price volatility - when prices go up and suddenly and unexpectedly
Bank for Agriculture and Agricultural Cooperatives (BAAC) - the Thai government owned bank used for most agricultural lending
risk-management mechanism - a system for protecting against possible harmful events
a derivative - a asset that are built on top of the value of another asset, their value is "derived" from the underlying asset
an option - a type of derivative that gives the right to sell or buy an asset at a particular price before a given date (See Economist glossary)
a put option - the right to sell an asset at a particular price before a given date (See Wikipedia)
incentive - a reward to encourage certain types of behaviour
Accelerating research and development (R&D)
Mr Nipon is also calling on the government to accelerate investing in research and development of crop varieties and breeds to upgrade the competitiveness of the country's agricultural sector in the long run.The government, he says, should focus on investing in irrigation systems, training programmes for farmers to learn more about modern technology, fertiliser utilisation and logistics development.
Prasit Boonchuey, president of the Thai Farmers Association, says that what farmers really want to ensure long-term competitiveness is an accelerated investment to develop efficiency and productivity, such as rice variety development and irrigation systems.
He also urged the government to shift unused pledging funds in certain years to set up welfare benefits to improve the quality of life for farmers.
"It is obvious that Thai farmers and traders are well positioned to compete with other players. We are currently No. 1 in rice exports and we are the forerunners in other farm products such as rubber and tapioca," said Mr Nipon.
"But what hinders the competitiveness of Thai products is the government's higher-than-market price pledging programme. This scheme is a sin against Thai farmers."
accelerate investing, accelerated
investment - make people invest faster
upgrade the competitiveness - make more competitive
ensure long-term competitiveness - make sure that people are still buying their products on international markets in the future
quality of life - the degree of well-being felt by a person or group of people, often very different from income, depending on such factors as health, stress levels, lean air, time spent in traffic jams, work hours, free time, the neighborhood you live in, the quality of life in the provinces is greater than Bangkok (See Wikipedia)
well-positioned to compete - in a situation that makes it easy to compete
players - companies and individuals who compete in a market
forerunners - the first ones to do some activity, who influenced those who came later
hinders the competitiveness - makes it more difficult to compete
higher-than-market price pledging programme - when the government always offers prices for rice far above even the long-term market price
upgrade the competitiveness - make more competitive
ensure long-term competitiveness - make sure that people are still buying their products on international markets in the future
quality of life - the degree of well-being felt by a person or group of people, often very different from income, depending on such factors as health, stress levels, lean air, time spent in traffic jams, work hours, free time, the neighborhood you live in, the quality of life in the provinces is greater than Bangkok (See Wikipedia)
well-positioned to compete - in a situation that makes it easy to compete
players - companies and individuals who compete in a market
forerunners - the first ones to do some activity, who influenced those who came later
hinders the competitiveness - makes it more difficult to compete
higher-than-market price pledging programme - when the government always offers prices for rice far above even the long-term market price
(Source: Bangkok Post, business, 20-04-09, Sowing seeds of sustainability, Phusadee Arunmas and Charoen Kittikanya, link)
