What determines distribution of profits
in Thailand's rice industry?
By Jon Fernquest |
If the price of rice skyrockets, do the profits from growing rice also skyrocket?
It depends.
1. What if the prices of inputs required for the production of rice, such as fertiliser, land and seed, also skyrocket?
2. What if water, which is limited and scarce but not market priced by supply and demand, was used up or became hard to find?
3. What if rice exports were restricted so that only domestic demand for rice and not international demand drove rice prices in Thailand?
4. What if small rice farmers collectively had enough capital to store an inventory of rice and sell it in the market at the optimal time when rice prices were high? Rice can be stored for years after all.
The point is that just because the price of rice increases does not mean that profits from growing rice increase also.
It would be nice if farmers were rewarded more for their efforts.
But this might be a goal to achieve through government policy, experimentation, and research, rather than merely assuming it should be the case as it was perhaps in the past.
A front page article in the business section of the Bangkok Post looked at this problem yesterday.
In the photo above, a farmer collects rice at a field used for testing new strains at Kasetsart University's Kamphaeng Saen campus. Researchers hope to develop new pest-resistant strains that can offer higher productivity.
Here is the article in full:
Who is getting the windfall?
Expensive raw materials mean that higher rice prices are not necessarily raising the incomes of farmers.
By Nareerat Wiriyapong and Phusadee Arunmas
Monday April 28, 2008
|
The sharp rise in rice prices should be helping heavily indebted Thai farmers climb out of poverty.
But farmers' net gains are limited as their costs have also risen significantly.
Prasit Boonchuey, the president of the Thai Farmers Association, says the cost of growing rice is about 5,720 baht per rai compared to 4,000 baht before prices started to jump.
Hom Mali rice is priced at 18,000 baht per tonne, and regular rice 13,000 baht. "In case any unexpected unfavourable incident happens, such as the crop being struck by disease, costs could be pushed up to 14,000 to 14,500 baht per tonne," he said.
Of the total expense, fertiliser tops the table of inputs at 1,200 baht per rai (see chart). Fertiliser prices have doubled to 20,000 baht a tonne in the past year.
Seed prices have also doubled as farmers must buy them from traders and the quality is not guaranteed, he said. Land rental fees are soaring as well. Farmers who used to pay 700 baht per rai per year are now paying 500 baht for one crop that lasts three months.
About 70% of Thai farmers don't own their land but rent from others. Many had to sell land to get out of debt.
A girl sits atop sacks of rice in a warehouse in Kanchanaburi. Traders are earning more from rice sales this year but industry analysts say millers are making the biggest gains.
"We have made some gains from the current prices of rice but they will be used for debt repayment. It's not enough to make farmers rich," says Mr Prasit.
"The current rice price is only enough for farmers to service all debt and get their rented land back. That would be just great for them at the moment."
Farmers who have left for the cities to seek better-paying jobs, such as driving taxis or factory work, don't want to risk coming home because conditions are so volatile, he adds.
"Even with the higher cost of living, those coming to town know exactly how much they will get per month. They are able to calculate the amount they should spend if they want to have savings.
"Meanwhile, farmers cannot predict how much they will get because they are lots of uncontrollable factors. It is very risky job."
Apichart Jongsakul, secretary-general of the Office of Agricultural Economics (OAE) says rising rice prices are likely to benefit millers the most, and the windfall would be ever higher if they are exporting.
"We expect the millers will enjoy higher incomes up to 60-70% [more than last year] from impressive rice prices, with exporters to see higher incomes of 20% and farmers about 30%," he said. "The income structure is expected to move like this if rice prices keep moving up further." However, he warns that farmers are expected to feel the pinch from higher production costs of about 40% in the next crop because higher fuel oil prices, expensive rental fees and costs of pesticides and fertiliser.
Plengsaksi Pakaspesat, president of the Thai Fertiliser and Agricultural Marketing Association, says fertiliser prices have doubled over the past 12 months because of high global demand.
The phenomenon affects Thailand, which imports 98% of the raw materials for local production of fertiliser.
"Thailand cannot dictate the price of fertiliser that we use," he says. "The major concern now should be how to get as much fertiliser as we need, not the prices."
However, Niphon Poapongsakorn, dean of economics at Thammasat University, says that every party involved in the rice sector should be expected to earn an equal share of the current gains.
"The rice market is seeing intensifying competition. People may believe that merchants have taken advantage of farmers, but the more the market competes, the more farmers will benefit."
Viroj na Ranong, the research director for health, economics and agriculture at the Thailand Research Development Institute (TDRI), also believes farmers have seen significant gains. He says rice prices so far have been keeping pace with higher input costs such as fertiliser.
Of course, local farmers' gains depend on global price trends, but the current run-up in rice has lasted two months and shows no sign of abating.
"If prices go up for only a few weeks or a month, farmers who have sold their rice would not benefit. This time, high prices have lasted long enough for Thai farmers to gain," Mr Viroj says. "Currently, farmers are obtaining a windfall from skyrocketing prices."
The more rice farmers grow, the more water they need, which has environmental implications. Mr Viroj suggested the government consider a water tariff to encourage farmers to use the resource more efficiently.
"Politically, a water tariff is very unpopular but the whole country could gain substantially if the same amount of water is available for use by more farmers," he says. "Many farmers realise this and are currently willing to pay 10,000 to 30,000 baht digging wells and installing pumps.
"They would rather pay for water than get zero water at zero price.
"As we will eventually need [more water], now would good time [for a tariff] when rice prices are high."
Pramote Vanichanont, honorary president of the Thai Rice Millers Association, says the paddy that farmers sell for 13,000 baht a tonne has 25-26% moisture content, and prices rise to 15,000 baht after millers dry the paddy to reduce moisture to 15%. Paddy milled into 5% white rice costs exporters 27,000 baht a tonne.
"This (milled rice) price excludes the expense of packaging by exporters which is normally about $50 per tonne. Given the rising world prices, we estimate exporters could enjoy a profit of about $70-100 per tonne compared with about $10 per tonne in the past," says Mr Pramote.
Vocabulary:
price skyrockets - price increases suddenly by a large amount (like a rocket lauch)
it depends - the answer to the question depends on the conditions
what if...? - the question to ask when thinking about different possible future situations
fertiliser - chemicals given to plants to help them grow (See Wikipedia)
scarce - limited, cannot use as much as you want like air
used up - all of the limited supply is used so that there is no more [Thai: mot laew]
collectively - large number of people acting together, acting united
capital - large amount of money invested in a business
optimal - the best possible
X, after all or after all, X - introduces supporting statement in argument
a point - a statement or generalisation that someone claims is true
a windfall - money received unexpectedly (See glossary)
strains of rice - special varieties of rice with useful characteristics bred by scientists using genetics
pest-resistant strains - a special variety of rice that insects cannot destroy
testing new strains - searching for useful new varieies of rice (research by scientists)
higher productivity - produce more rice for the same investment of resources (land, seed, fertiliser, labour)
indebted - has a lot of debts (borrowed money that must be paid back)
an incident - an event, something that happens
service debt - when the borrower pays money back to the lender (instead of "defaulting" and failing to make agreed upon payments)
volatile - frequently changing suddenly and unexpectedly
uncontrollable factors - things that happen, that you cannot change (stop or influence)
feel the pinch - experience difficulty from lack of money
pesticides - chemicals which kill insects that harm plants
dictate a price - say what the price is going to be, control the price
intensifying competition - more competition (offering lower prices to attract customers leads to lower profits)
Thailand Research Development Institute (TDRI) - a non-profit non-government Thai policy think tank focused social and economic development issues (See website and Wikipedia)
keeping pace with - going at the same fast speed as
a run-up - an increase
abate - stop
shows no sign of abating - does not look like it will stop
a water tariff - a tax on water usage, so people do not waste as though it was free and limitless
