TDRI on Thailand's new
rice price insurance
system
and the drawbacks
of the current system
By Jon Fernquest
Thai
rice farmers need protection from volatile
prices if
they are to survive and prosper. Some exposure to market prices is necessary. Why?
Farmers need to cut production to sustainable levels when demand for commodities such as rice falls during global economic downturns.
The Thai government simply cannot absorb limitless amounts of surplus rice.
Enough warehouses do not exist to store it all and when surpluses are eventually released onto world markets they will depress prices and lead to large losses for the government.
The Thai government also has to conserve limited funds and invest in items essential for improved rice production such as irrigation facilities and improved agricultural technology (Read International Rice Research Institute (IRRI) report).
Instead, recent Thaksin or Thaksin-backed governments have wasted huge sums in recent years paying inflated prices for crops to win votes and elections, then storing them in unsustainable stockpiles until they rot or create a problem for future governments like the current one (Read about political booty and money wasted).
Just because someone claims to be helping the poor doesn't mean that they are actually helping the poor. Simpler systems like the proposed crop insurance system are easier to monitor to make sure the poor are helped in a sustainable fashion.
Experts familiar with the detailed working of crop subsidy programmes even claim that the poorest and most disadvantaged farmers in Thailand are not actually receiving much of these subsidies at all.
Government
over-purchase
and stockpiling of rice, moreover, is a policy that
can actually harm
Thailand's rice industry in the long-run rather than help it, note: Thailand is the leading
exporter in the world, see pie chart on right (Read article
by noted Thai food economist Ammar Siamwalla and a
more recent article).
In today's article the Thai Development Research Institute(TDRI) discusses the new government plan for crop insurance for farmers that uses a put option as well as some of the flaws of previous systems that need to be corrected (Read article that explains put options for crop insurance).
"Selling government stockpiles of rice in smaller lots would allow smaller exporters to participate and would make bidding more competitive," is one of these suggestions.
This blog has been following these issues for several years (See archives at Business Blog and Easy Business English).
a drawback of Y- something
making Y less acceptable
insurance - making regular payments in exchange for a large payment to cover damage if a certain bad event happens (accident, sickness, fire, natural disaster) (See Wikipedia)
volatile prices - prices that move up and down in sudden and unexpected ways
exposure - in a position where you might be harmed or suffer damage
sustainable - can be continued for a long time in the future
surplus - an amount above the required or necessary amount
limited funds - limited amounts of money to use
irrigation facilities - canals and pipes that distribute water to farm lands
Thaksin-backed - Thaksin supported and financed
inflated prices - prices that are much too high
unsustainable stockpiles - large amounts impossible to store for long periods
political booty - money that politicians make from abusing their power
disadvantaged - having problems that make it more difficult than others to be successful
a subsidy - money given by the government to pay part of the costs of an activity (therefore supporting the activity)
Thai Development Research Institute (TDRI) - Thailand's first public policy think tank with economics research a specialty (See website)
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 derivative - a asset that are built on top of the value of another asset, their value is "derived" from the underlying asset
a put option - the right to sell an asset at a particular price before a given date (See Wikipedia)
flaws - mistakes, things that are not perfect about something
insurance - making regular payments in exchange for a large payment to cover damage if a certain bad event happens (accident, sickness, fire, natural disaster) (See Wikipedia)
volatile prices - prices that move up and down in sudden and unexpected ways
exposure - in a position where you might be harmed or suffer damage
sustainable - can be continued for a long time in the future
surplus - an amount above the required or necessary amount
limited funds - limited amounts of money to use
irrigation facilities - canals and pipes that distribute water to farm lands
Thaksin-backed - Thaksin supported and financed
inflated prices - prices that are much too high
unsustainable stockpiles - large amounts impossible to store for long periods
political booty - money that politicians make from abusing their power
disadvantaged - having problems that make it more difficult than others to be successful
a subsidy - money given by the government to pay part of the costs of an activity (therefore supporting the activity)
Thai Development Research Institute (TDRI) - Thailand's first public policy think tank with economics research a specialty (See website)
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 derivative - a asset that are built on top of the value of another asset, their value is "derived" from the underlying asset
a put option - the right to sell an asset at a particular price before a given date (See Wikipedia)
flaws - mistakes, things that are not perfect about something
RICE
Government urged to sell smaller lots
By PHUSADEE ARUNMAS16/06/2009 at 12:00 AM
The government is being urged to sell its stockpiles of rice in small lots, rather than in batches of several hundred thousand tonnes, to enable small-scale exporters to participate in rice bids and to increase competition.
"The government should scrap its rice auctions in big lots that require exporters to bid for a million tonnes, as this allows only large exporters to participate in the bids," said Nipon Poapongsakorn, president of the Thailand Development Research Institute (TDRI).
"The rice bids should rather be broken down into smaller lots, ranging from just one tonne to 1,000 tonnes."
The Public Warehouse Organisation should be directed to declare the rice prices every morning according to types of rice and their depreciation, he said.
If exporters offer to buy in big lots at lower than market prices, a working panel could consider whether to sell.
When prices are low because of oversupply, the government could also opt to suspend its rice sales to avoid a loss.
"Selling rice in hundreds of thousands of tonnes with five to six months in credit creates an advantage for certain groups of winning exporters, as they avoid extra expenses in keeping stocks. This also makes them profitable as exporters are able to sell rice in futures."
urged to - people
tried to persuade to do something
stockpiles - large amounts stored for the future
a batch, a lot - a collection of things of the same kind
small lots - a collection of a small number of things
scrap its rice auctions - end its rice auctions
broken down into smaller lots - make small groups from a large group
Public Warehouse Organisation (PWO) - the Thai government agency that stores rice bought by the government
depreciation - when things become less valuable over time
a panel, a working panel - a group of people who make decisions or judgements
opt to - choose to
suspend rice sales - stop rice sales temporarily
with five or six months in credit -
sell rice in futures - sell a futures contract for rice, promising to provide rice at a certain price in the future
stockpiles - large amounts stored for the future
a batch, a lot - a collection of things of the same kind
small lots - a collection of a small number of things
scrap its rice auctions - end its rice auctions
broken down into smaller lots - make small groups from a large group
Public Warehouse Organisation (PWO) - the Thai government agency that stores rice bought by the government
depreciation - when things become less valuable over time
a panel, a working panel - a group of people who make decisions or judgements
opt to - choose to
suspend rice sales - stop rice sales temporarily
with five or six months in credit -
sell rice in futures - sell a futures contract for rice, promising to provide rice at a certain price in the future
Government stockpiles currently hold about 4-5 million tonnes of milled rice.
The coalition government's unclear rice selling policy is drawing fire from the exporters who won the latest state rice auction totalling 2.6 million tonnes.
The cabinet last month stopped the Commerce Ministry's planned sales for fear of losses, even though the ministry had signed deals with 17 companies.
coalition government -
a government formed from more than one political party, joining
together to get a majority to control parliament
drawing fire from Y - being criticized by Y
an auction - a sale where people offer what the price they are willing to pay, the highest price wins and gets to buy
a deal - a formal business agreement
signed deals - signed an agreement or contract to do something
a guarantee - promise that something will have
drawing fire from Y - being criticized by Y
an auction - a sale where people offer what the price they are willing to pay, the highest price wins and gets to buy
a deal - a formal business agreement
signed deals - signed an agreement or contract to do something
a guarantee - promise that something will have
In a related development, Mr Nipon supported the government's crop price guarantee or insurance pilot project, which pledges a price for 200,000 tonnes of Hom Mali rice in the coming harvest.
The pilot project, approved by the cabinet early this month and to be run by the Bank for Agriculture and Agricultural Co-operatives, will cover eight provinces including Surin, Buri Ram, Maha Sarakham and Yasothon. The project will likely run from July until this December.
The price guarantee or insurance programme, functioning like a put option in the financial sector, would cost the government less than a conventional price intervention or pledging programme.
crop price guarantee - promise
that a farmer will get a certain amount for their crop
a pilot project - a small project to test an idea done before starting a large project
pledge a price - provides a guaranteed price to farmers for their crop
Bank for Agriculture and Agricultural Co-operatives (BAAC) - Thai government bank specialising in microfinance and banking for farming households (See website, a case study [pdf], at the FAO)
conventional - the usual and accepted way of doing something
price intervention - a government buying and selling in a market to influence the price
pledging programme, 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
a pilot project - a small project to test an idea done before starting a large project
pledge a price - provides a guaranteed price to farmers for their crop
Bank for Agriculture and Agricultural Co-operatives (BAAC) - Thai government bank specialising in microfinance and banking for farming households (See website, a case study [pdf], at the FAO)
conventional - the usual and accepted way of doing something
price intervention - a government buying and selling in a market to influence the price
pledging programme, 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
An option programme would give farmers an incentive to hold on to their rice in hope of benefiting from higher prices in future. This would reduce pledges under the mortgage programme, reducing state stockpiles and helping support market prices by reducing supply distortions.
Unlike the crop mortgage scheme, the scheme will give all farmers a chance to sell products at a set price, he said.
In the mortgage scheme, quotas are set according to crop areas nationwide.
as full, or his province is not granted a quota, then he misses out on price-pledging measures.
an incentive - a
reward that encourages a certain type of behaviour
a distortion - changing so that it is not true or acceptable anymore
supply distortions - excess or under supply, disagrees with supply that matches demand (market clearing)
quotas - the limited amount (that a participant is allowed)
granted a quota - given a limited amount
misses out on Y - was not included in Y, was left out
a distortion - changing so that it is not true or acceptable anymore
supply distortions - excess or under supply, disagrees with supply that matches demand (market clearing)
quotas - the limited amount (that a participant is allowed)
granted a quota - given a limited amount
misses out on Y - was not included in Y, was left out
(Source: Bangkok Post, business, RICE: Government urged to sell smaller lots, PHUSADEE ARUNMAS, 16/06/2009, link)
