Price matters: Gauging the effects of government support schemes for key commodities

Few issues are more controversial in Thai agriculture these days than the question of government schemes to support – or not support – prices. Indeed, this issue sent rubber farmers onto the streets in the autumn of 2013 to demand more government support, while in that year and 2014, other street protestors demanded less government aid when it came to rice. Politics plays a major role in both commodities, with the results not only distorting the markets, but perhaps also the political support the rival camps enjoy.

Historical Precedents 

Interventions by the government in the rice market, in particular, have a long pedigree in Thailand. After the Second World War, an export tax policy was created so as to bring hard currency benefits from rice exports to the exchequer, as well as to encourage rice farmers to expand their paddy fields. Those tax policies – and a certain amount of protectionism for the sector against rice imports – were gradually tapered out as rice exports became overtaken by manufacturing and industry as the country’s main economic drivers. The taxes were finally abolished in the 1980s and the market was then liberalised.

In 2001, however, a policy was introduced that enabled rice growers to get a fixed minimum price from the government. This was often set slightly higher than the market price, but was not a continuous feature. It was intended to be introduced when market conditions caused particular hardship to growers. Known as a rice “pledging” or a “mortgage” scheme, it was used in 2006, then again in 2008, even though that year, rice was in strong demand internationally, thus exposing the policy to allegations of political manipulation.

Under the mortgaging system, farmers who have been certified by the Rice Department of the Department of Agricultural Extension pledge to deliver paddy within a certain period (usually four months) to the rice mills. In turn, they receive a loan petition ticket (known as a bai pratuan), which on presentation to the state-owned Bank for Agriculture and Agricultural Cooperatives (BAAC) results in a payment at the support price, officially within three days. Once the pledged rice has then been delivered to the rice mills, the mills process it and send the results to the Marketing Organisation for Agriculture and the Public Warehouse Organisation, which store and sell it. At the warehousing stage, the government also opens the stored rice to competitive tendering from traders, with the winning bidders then able to sell the rice either domestically or internationally, according to the terms of the contract.

Current Support Scheme 

Since October 2011, the current government has also operated a price support scheme using this mechanism, yet in contrast, it has guaranteed to buy rice from farmers at a 40-50% premium to market prices, warehousing the results until the optimum conditions exist for a sale. Many analysts and observers have seen this current scheme as a major attempt to influence international prices by controlling supply. Leveraging Thailand’s global standing in the rice export sphere – the country became the world’s number-one rice exporter in 2007 – and by keeping rice locked away, the government could exercise greater control over market prices, pressuring them upwards on tighter supply. At the same time, the farmers would receive a healthier return on their paddy, boosting rural incomes and enabling the farmers to invest in the kind of productivity-boosting machines and irrigation systems that they need. The scheme, however, became unstuck as the premium paid to the farmers rose while global rice prices fell. This also began to occur at a time of increasing domestic political instability.

India’s decision in September 2011 to end a previous export ban on rice led to a sudden release of stockpiles, while other rice exporters, such as Vietnam and Cambodia, also stepped in, boosting the amount of rice available to global rice traders.

Thai rice thus became overpriced, while the bill to the farmers escalated as they continued to deliver more rice to the warehouses, encouraged by the high government support price. Warehouses reportedly then began to overflow, a position exacerbated by international rice traders switching from relatively expensive Thai rice to cheaper competitors. In early 2014 Thai white rice 5%, for example, sold at $463 per tonne, while the same type of rice from Vietnam retailed at $400 and from India at $420. Despite these challenges, Thai rice has continued to show remarkable resilience. According to the Thai Rice Exporters’ Association (TREA), in 2013 a total of 6.6m tonnes of rice of all kinds was exported, worth a total of BT133bn ($4.35bn). In 2012 the TREA reported, the respective totals were 5m tonnes, worth BT88.85bn ($2.90bn). Yet in 2011 – with the first 10 months of the year before the new scheme was introduced – the annual total was 8.29m tonnes exported, although on weaker global prices, this was worth just BT131.82bn ($4.31bn).

Sales

Rice left in warehouses suffers from deterioration over time, and this could also cause some potential risk to the global reputation of Thai rice for high quality. The government has moved to try and clear the warehouses through a number of international tenders, with one held in mid-February 2014 for 400,000 tonnes being significantly oversubscribed. This was likely due to concerns amongst traders that regional drought conditions could tighten future supply in 2014-15. According to a statement from the Foreign Trade Department to the TREA, at the time of the tender, around BT14bn ($457.8m) had been raised from rice sales since the start of 2014, with some BT170bn ($5.6bn) raised in sales since the start of the government’s current rice support policy. Yet the TREA suggests that it might take as long as five years to sell off the current stockpile (a period too long for some of this rice to be saleable), with suggestions that the rice be converted to animal feed, biofuel or other products instead.

Government-to-government deals, under which the actual sale price could be kept from market eyes, have also been a response, although several deals have begun to unravel as domestic political and legal challenges to the government have intensified. The Chinese government pulled out of a 1.2m-tonne deal in early 2014, citing uncertainty caused by a Thai corruption enquiry into the support programme, combined with a major anti-corruption crackdown in China itself.

By early 2014 the financing of the scheme was also in severe crisis, with many farmers complaining that they had not been paid, as the scheme soaked up more of the government – and the BAAC’s – resources, creating a major fiscal burden on the state. Some BT130bn ($4.3bn) in delayed payments to farmers was reported by Reuters in February 2014, with around 1m farmers affected. The BAAC offered a debt moratorium to assist farmers that month, as the government sought money from the bank to make payments.

A BT50bn ($1.5bn) loan to the BAAC from the state’s Government Savings Bank (GSB) in mid-February then caused a panic amongst GSB customers, fearful that their bank would be dragged into the growing debt to the farmers, which led to the loan being withdrawn on February 19. Legal challenges have also been made against loans to support the scheme being taken out by the government. These have been on the grounds that since the February 2014 elections, the government has been only a “caretaker” regime. Such challenges have also further undermined financial sector confidence in the scheme. Under such circumstances, the future of the rice programme looks to be in doubt.

Other Supporters

Price supports are also paid to sugar cane growers, with a price per tonne set for each growing season. The government is trying to persuade rice farmers to switch to sugar cane, with the Thai Sugar Millers’ Corporation suggesting in October 2013 that 6.7m rai (1m ha) of rice lands would be suitable for this purpose. Rubber, however, has not received the same support from the government. Indeed, the autumn of 2013 saw rubber farmers protesting in favour of the introduction of such a scheme, as global rubber prices fell. The government had attempted an intervention in 2012, buying up rubber at higher than market prices and stockpiling the results in the hope of a price rebound, but this policy was unsuccessful and lead to financial losses. In 2013 the government was thus reluctant to intervene again, although it did eventually promise financial assistance for the rubber farmers. Reportedly, however, not all received this, adding to political tensions. Rubber farmers, most often from the south, have often lined up with the anti-government forces long dominant in that region of the country. This contrasts with many rice farmers from the north and north-east, who have tended to back the current government, a position now looking shakier as the rice support starts to be unpaid. Indeed, political considerations have played a major role in both the rice and rubber intervention policies of successive Thai governments.

While calls to end the current scheme have come from bodies such as the TREA, the IMF and many others, the attractiveness of government intervention in the rice market in particular will likely remain for many Thai politicians, of whichever stripe. Rice, to many Thais, is not just an economic good, but a social one too, with the political weight of the large agricultural population still a major concern for any future government.