Rice support system at absurd above-market prices:
new technology for distributing political booty?
By Jon Fernquest |
The price to be offered by the government rice price support scheme for the 2008 crops remains up in the air.
Deputy Prime Minister Olarn Chaipravat says that world market prices should be used.
Chaiya Sasomsab, Commerce Minister and close associate of deposed Prime Minister Thaksin, disagrees. He says that the price for the main crop should not be below 14,000 baht a tonne. Why?
[Mr. Chaiya] insisted the buying price should not be below the high prices the government paid earlier for the second crop...the pledging price for the main crop should not be below 14,000 baht a tonne, as the prices of the government's existing stockpile would be affected (Source: Bangkok Post, business, 16-10-08, link)
Mr. Chaiya seems to be saying that if the government pays lower than 14,000 baht this will be the cause of the government losing money on the rice it has already bought, rice it paid an inflated price for (See below).
The price that rice can be sold for, like any other price, is set by markets, either domestic or international.
How can the government get 14,000 baht per tonne for rice when the world price is far below that? Charge people within Thailand a much higher price for their rice? Thai consumers subsidizing Thai farmers? Or maybe the government will just take the loss and Thai taxpayers (mostly in Bangkok) will pay for it?
Rice prices may go up in the future. Perhaps Mr. Chaiya is gambling on higher future rice prices? Or does anyone really know what Mr. Chaiya is thinking?
(See the archives of readbangkokpost.com for further background on the conflict over the government rice support system)
absurd - ridiculous and does not make sense
booty - valuables taken by soldiers, bandits, or robbers
up in the air - no one knows what will happen
associate - a person you are closely connected to either through work, business or friendship
deposed - removed from power
untangling a mess - solving the problems in a complex situation
Untangling the rice subsidy mess: M.R. Pridiyathorn's analysis
It is safe to say that government intervention in Thailand's rice markets has created a situation where hardly anyone knows what is going on.
The details of this mess have been elaborated in great detail by former central bank governor and Finance Minister M.R. Pridiyathorn Devakula in a Bangkok Post op-ed piece. Let's take a close look at this analysis.
First, what is the real purpose of a government price support programme for rice? What goals does this programme hope to achieve?
Government price supports for rice are meant to counteract the temporary dip in prices during the harvest season:
Rice pledging is normally implemented during the harvest period when supply surpasses demand and puts pressure on the price...Rice pledging does pull a certain amount of rice from the market and prevents the price from dropping. After that, when demand increases both for domestic consumption and for export, the market price will gradually increase and the owner of the rice can redeem the pledge and sell that volume of rice in the market for more than the pledging price and earn a higher income.
government intervention - the government entering into some activity when it normally doesn't do this (like buying and selling on markets)
what is going on - what is happening?
elaborated in great detail - give more details
X counteracts Y - X acts in the opposite direction of Y and lessens its effects
temporary dip in prices - a small decrease in prices for a short time
rice pledging - farmers deposit (pledge) their rice with the government in exchange for a price usually above the current market price (the current market price is low because of oversupply at harvest)
redeem the pledge - when the farmer takes the rice back after prices have risen again
When market prices are already high there is no need for a government rice support scheme. Government price supports can even encourage overproduction in this situation:
Normally, the pledging of rice from the main crop at the end of the year involves 2-3 million tonnes while the the second crop in the middle of year is usually in the hundreds of thousand of tonnes. This year the previous cabinet approved a second-crop pledge as high as 3.5 million tonnes, an unnecessary step since the market price at that time was very high. The average market price of rice in May (when the second crop came out) was as high as 13,297 baht a tonne, compared to 6,230 baht the previous year.At such a high market price, rice pledging is not necessary, especially for the smaller second crop when there is enough demand for export. But the cabinet forced it through against objections by government officials.
World rices price have dropped substantially since the peak earlier this year but the price supports remains the same at 14,000 per tonne.
Perhaps high rice prices are actually now seen as a gift that once given cannot be taken back rather than the temporary insurance against price fluctuations that they are meant to be?
If high rice prices are a gift, who are they a gift to?
The pledging price was determined at a record high of 14,000 baht a tonne, while the pledging price for the main crop at the end of 2007 was 6,600 baht, The cabinet cited its intention to maintain the market price at 14,000 baht, which is not feasible since the market price is also governed by the world price. The cost of white rice, milled from paddy at 14,000 baht, is higher than the world price and cannot be exported without a loss. It should be noted the market price of rice paddy has decreased from an average of 13,297 baht in May to 11,800 to 12,000 baht in September. It is likely to go down further as upcoming world harvests generate more supply as a consequence of very high prices.
objections - people were opposed to it, did not want it to happen
temporary insurance against price fluctuations - protections from selling when prices are temporarily low
cited its intention to - say that it is planning to do in the future...
not feasible - cannot be done, not possible
paddy - rice after it has been harvested from the field
white rice, milled from paddy - white rice bought in the store after it has been processed in a rice mill
Big government loses but who exactly gains?
The government price support programme for rice no longer serves its original function. The government is expected to take huge losses of 7 to 10 billion baht, losses that are someone else's gain. Whose gain?
It was no surprise that the higher pledging price attracted a stock pledge of up to 3.5 million tonnes, and it is natural that this amount of stock will not be redeemed and left in the hands of the state agency. The 3.5 million tonnes remains with the BAAC, and if sold immediately at the current price of 11,800 to 11,900 baht would result in a loss of at least 7.35 billion baht.However, selling this amount of rice will take time. Rushing it onto the market will only depress prices further. Plus, the main crop is due in two months and that will affect prices even more. It is conceivable, therefore, that the financial loss from the sale of the 3.5 million tonnes will be higher than 7.35 billion baht and could top 10 billion baht.
Are the huge government losses really a subsidy to farmers? Or are they actually a subsidy to someone else, like payback to the powerful local businesses that helped politicians get elected?
It is not difficult to see that the rice pledging scheme for the second crop this year was not necessary and it is not difficult to foresee that the market price cannot be maintained at the level of the pledging price. Is there a hidden agenda?A financial loss of 10 billion baht implies there must be something to gain. Does it benefit only the farmers? Or does it benefit middlemen and rice mills as well? There is also the question about the connection between politicians and those middlemen and rice millers. I would leave readers to find out the answers.
BAAC - the Thai government agricultural bank
It is conceivable that... - It might be that...
a subsidy - money given by the government to pay part of the costs of something
foresee - see what will happen in the future
hidden agenda - goals that cannot be seen (like politicians making money for themselves or their friends (cronies))
middlemen - buyers and sellers between the farmer and the consumer
rice mills - small factories that turn rice harvested from the fields into a product in bags that people can cook and eat
In fact, there is rather conclusive proof that millers and middlemen, not farmers, are benefiting from the price support system as it now functions:
The programme has been completely implemented and nothing can be done. The two ministers probably would not take responsibility anyway. Yet, there still are two more similar programmes that the government plans to implement. The first is the proposal of the commerce minister to expand the rice pledging scheme for the second crop from 3.5 million to 4.5 million tonnes. This is really strange as the second crop came out almost 5 months ago. There should be no rice left in farmers' possession beyond that for household consumption. The remaining rice should now be in the hands of the middlemen or rice mills.What worries me is the fact that the cabinet in September approved the pledging price of 14,000 baht even though the market price in September was not more than 12,000 baht. It actually benefits the middlemen and rice millers who had purchased rice at the market price to pledge at the higher price of 14,000 baht - giving them an easy profit of around 2,000 baht a tonne.
conclusive proof - proof showing something is true for sure
completely implemented - project has already finished
Who is responsible? Is this yet another case for the National Counter Corruption Commission?
It is noted that the approval to expand the pledging target from 3.5 million to 4.5 million tonnes was done in a hasty manner. The proposal was put to the cabinet on Sept 16 after the former prime minister was sacked and before the new PM was installed. The Sept 16 cabinet meeting was chaired by the acting PM.Up until now, hundreds of thousand of tonnes more have been pledged and it is believed stocks will reach 4.5 million tons very quickly. The additional one million tonnes would make a loss of more than 2 billion baht if sold immediately. But as it normally takes time to sell, the market price is likely to go down with the world price and the loss could finally settle at 3 billion baht. The question is, who approved the programme, and who will take responsibility for the loss which could clearly be foreseen when the pledging price was approved. It should not be difficult to find out.
The main crop 2008
Another programme in the pipeline could make an even higher financial loss. This is the pledging of the main crop at the end of this year which the National Rice Policy Committee approved with a target of 8 million tonnes, the highest volume ever implemented in a single harvest, and at the again high price of 14,000 baht for rice paddy (and 16,000 baht for jasmine paddy).
It can be expected that the market price for rice paddy at the time of implementation will be around 10,000-11,000 baht, which is higher than ever before and should generate a good profit for farmers. I agree with the pledging programme in order to reduce pressure on prices so they do not go below 10,000 baht. But setting the pledging price at 14,000 baht means those who will benefit are those who pledge their rice. However, the output of the main crop is more than 21 million tonnes. The remaining rice may have to be sold at less than 10,000 baht because the 8 million tonnes in possession of the state agency will naturally prevent the price from going up, or even down, as traders can wait to buy from the government agency instead of the market.
It is quite clear that this stock of 8 million tonnes will have to be sold and it could generate a loss of as much as 24 to 30 billion baht, which will have to be absorbed by taxpayers later on.
It is now rumoured in rice trading circles that the middlemen and rice millers are starting to purchase the future output from the main crop at the current price, which farmers find profitable, in preparation for pledging with the state agency at 14,000 baht.
However, the programme as approved by the National Rice Policy Committee is yet to be approved by the Cabinet. I hope that when this matter is discussed in the Cabinet, the deputy prime minister for the economy and the finance minister, who are scholars and understand the issue quite well, will oppose it and prevent such a massive financial loss. I hope both of them are independent enough to do what's right.
Finally, I would like to hear from the Administrative Court and eminent legal experts that when politicians make decisions that clearly will lead to an obvious financial loss they can be held responsible.
M.R. Pridiyathorn Devakula is a former finance minister and former governor of the Bank of Thailand.
(Source: Bangkok Post, op-ed section, M.R. Pridiyathorn Devakula, 06-10-08, link)
