Will Thailand continue to be world's #1 rice exporter?
If rice subsidy vote buying strategy continues...

By Jon Fernquest

The government is paying farmers far beyond the actual world market price for rice.

This is a subsidy to farmers that many say is meant to buy their votes to ensure victory in elections.

In the beginning, rice was grown as a domestic food supply, later Thailand became the world's number one rice exporter. Recently, it seems, rice is only grown to receive government subsidies.

How long will Thailand continue to be the world's leading rice exporter if this policy continues? That is if the government continues to manipulate prices in Thailand's rice market to win elections?

Only old low cost rice sold to exporters.

Although the details are complicated, it appears that the government is taking steps to avoid losses on rice purchased recently at prices far above market prices. Only old rice bought at lower prices is being sold:


The government will continue to store the rice purchased at inflated prices:

Subsidy already large and growing bigger

For plain white rice the government is paying 12,000 per tonne.

At current exchange rates this is US$650 per tonne.

Rice exporters are quoting rice at $550-560 per tonne.

Meanwhile, Thailand's rice export rival Vietnam offers the grain at $400-420 a tonne.

Some experts are predicting even further declines by next year to $300 per tonne.

What is causing these falling rice prices?

Demand-side of the market

Demand is falling. When demand for a good falls, prices also fall.

Demand for Thai rice exports is projected to fall from 10 million tonnes this year to the range 8 - 8.5 million tonnes next year (2009). It looks likely that the Thailand will miss its export target of 9.5 million tonnes for 2009. 

Exporters report: "the market is quiet and there are no big orders these days, especially in the first week of this month. We shipped only 97,000 tonnes, which was 62% less than in the same period the year before."

Supply-side of the market

The jump in rice prices earlier this year led to an oversupply of rice:


By offering prices far above market prices, the government's price support programme for rice (rice pledging programme) has encouraged farmers to grow more rice even as the price of rice began a long downwards trend earlier this year:


The rice producing sector faces a two-tiered system of rice prices. International rice prices are largely determined by international markets. With international rice prices at a low level and still falling, domestic prices inside Thailand are higher than international prices.

Consumers are paying for the rice subsidy to farmers in two ways. First, they are paying with currently higher domestic prices for rice inside Thailand.   Second, they will pay if the government decides to take losses on rice it purchased in the past at prices far above market levels.

Falling rice export prices have hurt exporters

Importers purchased large amounts of rice at very high prices earlier this year. Sometimes they even bought more than usual because they were expecting rice prices to increase even further. Nigeria imported almost 800,000 tonnes in the first nine months of 2007 which is a 260% increase from the same period a year earlier.

Importers who bought rice at these high prices have used all sorts of strategies to avoid actually paying these higher prices including delaying payments and refusing to honour payments. 

Credit crunch leads to reduction of rice inventories

Exporters use large amounts of money to purchase rice.

Large inventories of rice stored for long periods tie up an exporter's money (capital).

To store inventories of rice for long periods of time exporters must borrow money, but borrowing money is difficult now because of the global credit crunch, so everyone who buys and sells rice, including exporters, is cutting back on inventories to cut costs: "Thai exporters have cut their stocks by half, from the one million to 1.5 million tonnes they normally maintain in their warehouses."   

Thaksin's political strategy changing?

Frequent contributor to the Bangkok Post's op-ed pages, Australian academic Michael Connors, predicts that Thaksin's next move may be to mobilize left-wing elements of his support base, the sort of people who would probably call for even more rural subsidies in the rice market:



In the post-2006 rewrite of Thailand's constitution the ISOC unit of Thailand's military has a greater role and power in the new Thai state. ISOC originated during the Cold War in the fight against Thailand's communist insurgency. When the constitution was being written in 2007 the idea of a new ISOC fighting a new cold war may have seemed a little absurd. It may not be absurd any longer (Read Chang Noi's two articles: A State at War with its People and A New Cold War).

(Source #1: Bangkok Post, business, Rice outlook dim amid distortions, 17-11-08, WALAILAK KEERATIPIPATPONG, link)

(Source #2: Bangkok Post, business, Rice sale falls short of goal, POST REPORTERS, 15-11-08, link)

Posted by Jon Fernquest at 12:35 PM | Permalink | Comments (0)