WSJ on the core failure of Thailand’s rice pledging schemeBy Bangkok Pundit Feb 10, 2014 10:00AM UTC
Peeradej Tanruangporn of TDRI had an op-ed last week in the Bangkok Post. There are a number of parts of the op-ed which BP agrees with, but other parts where BP does not think they diagnose the problem correctly:
Under the current scheme, the government has acted as if it has a monopoly in the rice business. The government bought rice from farmers under a fixed price and was responsible for selling it. The consequences?
Second, rice pledging has decreased the competitiveness of Thai rice producers. One easy measure of competitiveness is market share, in which Thailand lost a lot because the government failed to sell the rice. In terms of input costs, the Thailand Development Research Institute’s (TDRI) 2013 research project, “Thai Rice Strategy” reveals that both farmland rental rates and fertiliser prices increased after the rice-pledging scheme was implemented while productivity remained the same.
There is also evidence that rice-related labour costs rose after the scheme was implemented. The industry’s efficiency also fell because many middle merchants who help make the system efficient lost their jobs because of market monopolisation by the government. For exporters who specialise in selling to different customers, the exclusion of some means that Thai rice has weaker sales power.
BP: On the government acting as a seller of rice, BP agrees this is a problem (more below). On the competitiveness aspect though, BP is more skeptical. Labour costs rising could also be related to the 40-90% increase in the minimum wage. Yes, the daily minimum wage only affects the formal sector of the economy, but with such low unemployment if you increase the wages for the formal sector, it will draw labor from the informal sector and so to counter this, higher wages need to be offered to labour in the informal sector such as by rice farmers. This is actually part of the reason why BP believes the government implemented the rice pledging scheme in the first place as a consequence of increased labor costs with the increase of the minimum wage meant the government decided it would need to do something.
On farmland rental rates and fertiliser prices, BP doesn’t doubt they have increased, but how do you stop this if you are offering some subsidies to farmers? You are increasing the value of the land as people have been incentivised through higher prices to grow more rice. It would be difficult to have a subsidy where prices for rental rates did not increase. Fertiliser prices are more complicated as fertiliser is a controlled good subject to price controls with the problem becoming that amount of lower quality fertiliser being offered was lower, credit was suddenly no longer offered, under-the-table payments were needed, and there were shortages. The government relaxed this in January 2013 so officially the price has gone up, but this just reflects the market price. There are no import tariffs on fertilizer so it can be imported from overseas (all this information is actually from TDRI from these slides). Now, higher prices means greater demand and, by logic, this can increase prices, but this is not something specific to the rice pledging scheme. Any form of subsidy will have the same result.
On industry efficiency, this sounds quite plausible and it is a problem with the government acting as a seller of rice.
The op-ed continues:
Another big concern is the government’s role as a market player. The government is bad at the rice business and its monopoly only made the situation worse. The government failed to sell Thai rice, making Thai rice lose market share and leaving Thai farmers unpaid. Mr Viroj argues that the government does not understand the rice market enough and should not be involved in trading rice. There were opportunities when the government could have cleared rice stocks but it kept on speculating for a higher price. Thailand used to export 11 million tonnes of rice per year (roughly one million tonnes per month) and it is not clear if the government is even operationally capable of selling that much rice per month, let alone stock up for speculation. Now the government is left with a huge supply of old rice of questionable quality. What’s worse, the government has kept the accounting details of the scheme obscure, hidden from public scrutiny, making it very difficult for it to receive constructive feedback.
BP: Agree, on the government acting as a seller of rice. The Thai government is hardly the most efficient entity at the best of times and should not be in the business of selling rice. Also, agree that the government should have bitten the bullet and accepted greater losses in 2012 and the first half of 2013. However, the government finally did realize this and it did start to increase sales and hence the price did drop:
BP: TDRI call this speculating on a higher price, but it was more hope of a higher price so the overall cost of the rice pledging scheme would not be so high. Also, rice exports have not traditionally been “roughly one million tonnes a month”. In the 5 years before the introduction, they were around 800,000 tonnes a month as the below graph shows:
Also, one of the key reasons for the higher-than-expected cost of the rice pledging scheme is India starting to export non-basmati rice again. WSJ:
An attempt to set global rice prices has stripped the country of its position as the world’s top exporter, left its prime minister facing a potentially ruinous investigation into the management of the plan, and thrown thousands of farmers like Mr. Thongma into a deep hole of debt.
Mr. Thongma’s tale began two and a half years ago. Prime Minister Yingluck Shinawatra launched a gambit to shift more cash into the rural economy by buying up rice from farmers at about 18,000 baht, or $550, a ton, around 50% higher than the market rate. [BP: Actually, it is 15,000 Baht although there are different prices depending on the type of rice]
Ms. Yingluck and her advisers also reckoned they could drive up global rice prices by storing the grain they bought from farmers in vast warehouses, withholding it from the global market.
The plan relied on the fact that only 7% of the world’s rice output is traded cross-border. That means that a disruption in one place can have a dramatic effect on international prices. In 2008, some countries such as India and Vietnam, worried about rising rice prices at home, temporarily restricted rice exports. That sent global prices soaring from $300 a ton to a peak above $900, according to the World Bank, triggering food riots and protests from Haiti to the Philippines.
reality quickly sank in.
The timing of the government’s rice program could scarcely have been worse. Just as Thailand began withholding rice from the international market, India resumed exports after a long absence.
BP: Exactly, as noted in a post in August 2012, it is India which is key reason why the cost of the scheme is much higher than expected and shows the problem with a rice pledging scheme. Yes, there are many other problems with the scheme as mentioned above and there are specific problems with the implementation of the scheme in the latest harvest in regards to payment which has become a political problem for the government, but they are separate from the core underlying problem with the scheme. India’s Business Standard on May 5, 2012 had this chart showing what has happened to Indian rice exports :
The Economic Times from January 2014:
In 2012/13, India’s overall exports totalled 10.1 million tonnes, including 3.5 million tonnes of basmati.
BP: Hence, non-basmati rice exports were 6.6 million tonnes. To put this in perspective. FAO from November 2013:
FAO’s forecast of world trade in rice in calendar 2013 has not changed since July, remaining at 37.5 million tonnes (milled basis), implying a 2 percent contraction from the 2012 record. The retrenchment is expected to be demand-led, and mostly imputable to import cuts in the Far East (Indonesia, the Philippines) and in Western Africa (Nigeria, Senegal), a reflection of good crops, but also of the restrictive policies instituted as part of self-sufficiency programmes. Poor production results, combined with strong domestic demand, are, instead, foreseen to lift purchases in Europe (EU), Latin America and the Caribbean (Brazil, Colombia) and North America (United States). Among exporters, the faltering import demand is foreseen to curb shipments from Vietnam the most, although supply constraints and high prices are also expected to depress sales by Argentina, Brazil, and Uruguay. Given a poor delivery record so far, Thailand appears unlikely to boost its exports beyond the relatively low level of last year. Expectations have, instead, improved for India, which may replicate the 2012 record performance, with Australia, Cambodia, China (Mainland), Egypt, Pakistan, Paraguay and the United States also forecast to export more.
Global trade in rice in 2014 is currently forecast at 38.3 million tonnes, 2 percent above the 2013 current trade estimate and only fractionally short of the 2012 record. On the export side, much of the trade growth is forecast to be captured by Thailand, where government releases of supplies from stocks have resulted in prices falling in recent months, helping the country regain its competitive edge. Ample supplies may also enable Brazil, China (Mainland), Egypt, Guyana and Paraguay to step-up deliveries. However, a return in force of Thailand as an exporter is seen to affect negatively sales from most of the other suppliers, in particular India, which may, nonetheless, retain its dominant position in the global rice market. Shipments by Argentina, Pakistan, Uruguay and the United States are also anticipated to fall.
BP: So total trade is 38.3 tonnes. India went from exporting just 2 million tonnes in each of the 3 years before the rice pledging scheme was implemented to over 10 million tonnes now. This is just under 8 million tonnes or just under 20% extra supply on the market. BP is unsure of the exact size of the non-basmatic rice market worldwide on its own, but it would mean that slightly over 20% more additional supply. India’s prices are significantly lower than that of Thailand so the only way that Thailand could then compete would be to lower its prices which it has done now and this is why it is expected that Thailand exports will increase in 2014, but this means that Thailand is losing more money per tonne and this is why the cost of the rice pledging scheme is becoming so high. There is no way to get around this. As long as India is exporting non-basmati rice at such levels, this means that the price for Thai (and Vietnamese) rice will be quite depressed/low and this brings into question the affordability of the current price of 15,000 Baht a tonne for the main harvest and 13,000 Baht a tonne for the second harvest (this was only lowered last year for the second harvest). In BP’s view the government missed the chance last year to move to an alternative scheme. As blogged in October 2013:
There are just too many world players and with India’s re-entry into the non-basmati rice export market in 2011, there is simply too much rice on the market for the government to try to exercise some control of the market. BP has no confidence of the government’s ability to act as the seller of rice and the constant talk of rice sales abroad which have not panned out just makes the government look ridiculous. The two years of the pledging scheme have not instilled BP with any confidence that the government knows what is doing in trying to sell rice.
If anything the current implementation shows the government should steer clear of trading and like Pridiyathorn says just leave it private rice trading firms. A direct subsidy scheme will still cost a lot. Pridiyathorn talks about 2,500 Baht per tonne which BP is sure that farmers won’t go far given they receive far more than under rice pledging. However, at around 4,000-4,500 Baht a tonne, it would make selling the change to farmers much easier. Even then with a direct subsidy of 4,000-4,500 Baht a tonne at the time rice is sold and set a maximum of how many tonnes per household per year (say 15-25 tonnes per household per year) then if you have around 20 million tonnes you are talking about 80-90 billion Baht a year. Remember the Democrat’s rice income guarantee scheme cost 67 billion baht in its final year (see also USDA report for the costs). There will be also be some costs for administering the scheme, but there will be such costs for any scheme.
With a direct subsidy, the government can let the private sector deal with the rest so this avoids this all of the messy complications and uncertain cost of the current scheme. Even now, the costs of the pledging scheme are still unclear. It will also avoid misleading articles to the “cost” because now the cost will be clearer as there is no need to deduct costs for money made from selling rice as well as storage and all other various costs. A direct subsidy won’t stop many farmers being screwed, but the rice pledging scheme hasn’t done this either.
One reason for pledging is that farmers know the amount of money they will receive, but the reality is that farmers don’t know how much they will receive under the pledging scheme. Under the pledging scheme, the moisture content of rice must be lower than 15% to get the 15,000 Baht pledging price, but most farmers do not pledge rice that has a moisture content of less than 15% so they don’t get the 15,000 Baht and instead get a lower figure depending on the moisture content or quality of the rice. If necessary, the direct subsidy could be adjusted by harvest to provide certainty.
BP: The market price is now 8,000 Baht a tonne so the current subsidy is 5,000-7,000 Baht a tonne (that is of course if the rice is 15% or less moisture content and rice of a certain quality/grade which most farmers cannot achieve). BP has no doubts that many farmers will be unhappy,* but the current scheme has just too many moving moving parts and is unwieldy. Trying to drive up the price on the world market has not worked. Given this, rice pledging has failed to increase the market price (although the opposite is not true as the decrease in the market price is more related to India resuming exports). Hence, BP views that some other form of subsidy which doesn’t involve the government being in the business of selling rice is a better option. A direct subsidy or something similar would be a much easier scheme to implement and manage. You can set a budget and you wouldn’t have to go through the problems the government is facing now with trying to issue bonds and who to borrow the money from.
* There is a very long poll (56 pages) from September interviewing 1,200 farmers about rice pledging and various other issues which have been working on translating and blogging (actually have been slowly working on it for last 10 days while blogging on other issues, but well it is taking more time than planned so decided to shift gears with this post instead). The poll though shows the problem for the government of changing to a different scheme because of the support for rice pledging scheme so this is why BP is skeptical that a 2,500 Baht a tonne that Pridiyathorn was suggesting would work. The money being offered would be just too low and this why BP suggested a higher figure would be needed to sell the program to farmers and win their support. Nevertheless, while the government is facing problems and anger from many farmers over the lack of the payment, what this means at an election is not as easy to decide. Many won’t vote for the government again, but many of the farmers who are more vocal now are not from areas of the country where Puea Thai is that popular or as popular anyway (another post on that to come too!). Farmers want the scheme and are unhappy about not being paid; other critics of the government want the scheme scrapped entirely with differing views on what it will be replaced with but from all proposals BP has seen, the money that farmers will get will be significantly less than under the current rice pledging scheme. Hence, it will depend on what policy the Democrats offer and what policy Puea Thai offers at any subsequent election. Anger now many change when they face different choices over what scheme….