Government admits: we are losing money on rice sales
Finally, the moment of truth has arrived: Thailand will have to sell its huge rice stocks, bought up under the controversial rice mortgage scheme, at a huge loss. Minister Nawatthamrong Boonsongpaisan (PM's Office) was reluctant to admit that on Thursday.
The sale of the rice is urgently needed because the government owes 476,89 billion baht to the Bank for Agriculture and Agricultural Cooperatives (BAAC), which pre-finances the program. The Commerce Secretary has so far transferred only $65 billion to the state bank from rice sales.
If the government wants to continue the programme, it will have to sell quickly in the coming months in the 2011-2012 rice season and the first crop of the 2012-2013 season, because the warehouses are overflowing and the longer the rice has been there, the more the quality declines.
The mortgage system has been launched by the Yingluck government [at the insistence of former Prime Minister Thaksin] with the aim of increasing farmers' incomes. It pays prices that are approximately 40 percent above market prices. According to the government, this should not have been a problem, because the price of rice on the world market would rise. However, the price has hardly risen, making Thai rice unsaleable, exports have collapsed and Thailand has been overtaken by Vietnam and India as the world's number 1 rice exporter.
Since its introduction, many people have been calling for a revision of the program because it is a major drain on the state's finances and it does not benefit the farmers, but the millers, large landowners and corrupt politicians. The 2011-2012 rice season resulted in a loss of 140 billion baht and this amount will rise to more than 210 billion baht for the 2012-2013 season. A small 'light point' is the fact that the yield of the second crop is lower than expected due to the drought. Bad luck for the farmers, but good for the government, which has to buy up less rice.
Jac Luyendijk of Swiss Agri Trading SA says the long-term outlook for rice prices is bleak. “The problem is getting bigger and bigger because of Thailand's rising rice stocks. When Thailand starts selling it, we will be stuck with very low rice prices for the next few years.'
(Source: website Bangkok Post, March 7, 2013; curiously, this article is not in the paper newspaper)
Short explanation
The rice mortgage system, reintroduced by the Yingluck government, was launched in 1981 by the Ministry of Commerce as a measure to alleviate the oversupply of rice in the market. It provided farmers with short-term income, allowing them to postpone selling their rice.
It is a system in which farmers receive a fixed price for their paddy (unhusked rice). Or rather: with the rice as collateral, they take out a mortgage with the Bank of Agriculture and Agricultural Cooperatives. The Yingluck government has set the price for a ton of white rice at 15.000 baht and Hom Mali at 20.000 baht, depending on quality and humidity. In practice, farmers often receive less.
Because the prices paid by the government are 40 percent above market prices, it is better to speak of a subsidy system, because no farmer pays off the mortgage and sells his rice on the open market.
From News from Thailand, March 7
The Bank for Agriculture and Agricultural Cooperatives, which pre-finances the rice mortgage system, will most likely have to call on fellow bank GSB to finance the system. The BAAC already has to pay higher risk premiums in interbank traffic because of concerns about the stability of the mortgage system and the bank's liquidity.
The cost of the mortgage system for the 2012-2013 rice season is estimated at 300 billion baht. Of this amount, 141 billion baht is provided by the Public Debt Management Office. The rest must come from contributions from the Ministry of Commerce from sales of rice bought in the previous season. But this is where the shoe pinches, because that rice is virtually unsaleable because of the high price that the government pays the farmers.
The BAAC could borrow the remaining money, but the government is reluctant to provide guarantees, as it wants to use that space itself to carry out its infrastructure plans in the coming years. So the Government Savings Bank will have to come to the rescue.
As reported yesterday, Mother Nature lends a helping hand, because the drought means that considerably less rice is harvested than expected, which provides a nice financial benefit. Not for the farmers, of course, but for the ministry.
The message 'Government admits: we suffer a loss on rice sales' has now been supplemented with a brief explanation and a news item about the financial position of the BAAC.
In the EU, too, we have had situations like this since the 60s – some of them even still exist – in the context of the Common Agricultural Policy (CAP). Farmers received guaranteed prices far above the world market price for certain products, and in order to make export possible, the difference between the guaranteed price and the world market price was paid to the exporter upon export. Conversely, when importing into the EU, that difference had to be paid as a so-called agricultural levy, which of course discouraged imports…………
In certain sectors, products were also purchased by the EU at a set (too high) price and then stored; this gave rise to phenomena such as the 'butter mountain'. Such stocks were often dumped onto the world market at dumping prices. This is very much to the chagrin and disadvantage of developing countries, for example, who saw their own sales of similar products collapse as a result.
You can also see such factors in the Thai rice mortgage system. I can imagine that people want to secure rice production, but that would have to be linked to production quotas. As it is now - if I understand it correctly - in fact, the highest possible production is being stimulated, which ultimately exceeds the demand of the market.
Dick: That incentive is in the fact that the government has promised to buy up 'every grain of rice'.
@ Cornelis You argue for production quotas. Others mention quality improvement (higher nutritional value), organic farming (far too much spraying is used in Thailand), product innovation (rice-based products, of which there are already numerous) and higher production per rai (Vietnam scores much better on this).
By the way, good response from you, the comparison with the agricultural policy of the EU.