Thailand sitting on rice piles

by Susan Reidy
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Thailand is sitting on as much as 17 million tonnes of rice and could lose up to $3.2 billion in 2013-14 due to a pledging scheme introduced in 2011 that was to provide price support for the nation’s millions of rice growers.

Under the so-called pledging scheme, the government guaranteed farmers a set minimum price for their rice, should the market rate fall below a certain level. But the minimum price has, for the most part, remained well above free market rates.

The primary objectives of the program included raising income levels for local growers and increasing the price of Thai rice on international markets. While the first goal has been realized, the government is falling painfully short on the second.

With global stocks hitting a 12-year high, international rice prices have ranged from static to declining. As a result, the government is stockpiling rice purchased at a premium from growers in hopes of better prices in the future. Some estimates say the government has 17 million tonnes of rice stockpiled, but state agencies say it is closer to 10 million tonnes. The stockpile is large enough to meet demand from the eight biggest importers and still have some left over.

The government has paid almost $19 billion for rice, paying farmers directly $473 per tonne for unmilled rice. However, the cost for Thailand reaches nearly $700 million per tonne when factoring in the cost of milling, transport and storage, according to the Oxford Business Group.

Thailand lost an estimated $4.3 billion in the program’s first year, according to the group and could spend as much as $8.6 billion this year on rice purchases. Rating agency Moody’s took notice and this summer said the scheme was hampering the nation’s ability to balance its budget. It also said the scheme is adding to the cost of Thailand’s debt by raising questions over fiscal transparency. Moody’s said the program could take up to 8% of Thailand’s national budget.

Stockpiling exports

Prior to the rice pledging scheme, Thailand exported 8 to 10 million tonnes of rice overseas each year. That fell 35% last year to just under 7 million tonnes in 2012, when high prices from the scheme made rice from India and Vietnam more attractive. For the first time in 30 years, Thailand was no longer the world’s largest exporter.

A similar situation could happen in 2013, with major competitors pricing rice way below Thailand’s rates. The Thai Rice Exporters Association said exports were down 5.1% in the first seven months of the year in volume and by 5.6% in earnings.

The surplus is expected to grow with the 2013-14 harvest, which began in October, reaching around 15 million tonnes. The second harvest, which will start in February, is the main source of rice and could yield 20 million tonnes or more.

For the first harvest, the Thailand government has said it will pay a base rate of $473 per tonne. It plans to reduce that to $410 for the second harvest, which is closer to current international prices for unmilled rice, the Oxford Business Group said.

The government also has limited the maximum value of rice each farmer can sell, in hopes of curbing the subsidy’s expense. This year’s program, which runs from October 2013 to September 2014, is estimated to cost around $8.6 billion for the purchase of 11 million tonnes of rice.

Since the program started in 2011, the government has approved a budget of $16 billion, but it has already spent $21.4 billion. The Commerce Ministry says it has paid back $5 billion from rice sales.

The government is having difficulty unloading its expensive rice. This summer, the Commerce Ministry offered 660,000 tonnes of rice but only sold about 240,000 tonnes.

There is growing concern about the quality of the rice, which is also contributing to the difficulty in making sales. Not only does rice deteriorate the longer it’s stored, but there are also reports that substandard rice is being mixed with Thailand’s top-grade jasmine rice. The Economist reported that there are allegedly gangs and corrupt officials who have smuggled in thousands of tonnes of cheap rice from Cambodia and Myanmar to take advantage of the government program.

China agreement

Thailand may see some relief with new agreements finalized with China. According to Thailand’s Foreign Trade Department, the nation has two contracts with China to supply about 4 million tonnes of rice from 2012-17.

Under one agreement finalized on Sept. 12, China will buy 1.2 million tonnes of Thai rice over the next 12 months. The commerce ministry didn’t detail the prices, but at current rates the sale could be worth more than $500 million, the Oxford Business Group said.

Some of the details are being called into question by exporters, who said China hasn’t bought that much rice since suffering a serious drought 10 years ago. However, heat waves in China may cut domestic production this year, and the International Grains Council (IGC) is forecasting a 1.1% contraction in output. Imports are expected to increase 6.3% to 3.4 million tonnes, according to data from the U.S. Department of Agriculture (USDA).

Thailand sold 143,082 tonnes of rice to China last year, nearly half of the 328,238 tonnes it sold in 2009, according to a trade board. In the first eight months of the year, Thailand has exported 110,742 tonnes of rice to China.

China buys most of its rice from Vietnam and Pakistan, where it is cheaper.

“The Thai government needs to take huge losses of more than $200 to $300 a tonne, if it would like to encourage more exports to China,” said Charoen Laotamatas, vice-president of the Thai Rice Exporters Association, in a recent media report. “The current cost of 100% white rice under the pledging scheme is $700-$800 a tonne. China will buy more rice from Thailand if the price is competitive and quoted at about $400 a tonne, the same as Vietnamese or Myanmar rice.”

Other potential positives for Thailand include an expected harvest decline in Vietnam, where the government is encouraging farmers to switch to other crops. Production in the U.S. also is expected to contract 7.8% to 5.9 million tonnes, according to the IGC.