Thailand, Rural Incomes and Subsidies

I stumbled upon this article yesterday and couldn’t quite believe what Thailand is attempting (excerpt):

Thailand May Cede No. 1 Rice Ranking to Raise Rural Incomes

Sept. 13 (Bloomberg) -- Thailand is willing to relinquish its role as the world’s biggest rice exporter as the government prepares to buy grain directly from farmers to boost prices and rural incomes, Deputy Prime Minister Kittiratt Na-Ranong said…

…Prime Minister Yingluck Shinawatra aims to insulate the country of 66 million people from a global slowdown by lifting incomes of poorer Thais who propelled her party to victory in a July election. The plan to guarantee rice prices may boost export rates by almost 20 percent and erode the nation’s share of the global market, said Sarunyu Jeamsinkul, deputy managing director at Asia Golden Rice Ltd., Thailand’s largest shipper…

...The government plans to pay 15,000 baht per ton ($498) for unmilled white rice and 20,000 baht for Hom Mali fragrant rice, as much as 47 percent above current market rates, according to Bloomberg News calculations based on data from the Thai Rice Mills Association. Purchases are due to start on Oct. 7.

Thailand’s effort to raise farm incomes may fuel price gains across a region that the USDA estimates accounts for 87 percent of global rice consumption. Thailand has been the world’s largest exporter since 1981, according to the USDA…

…Competing suppliers may also take the opportunity to raise prices, Abah Ofon, an analyst at Standard Chartered Plc, said in an interview with Bloomberg Television today.

“Up to 12 months, there is a risk we see that elevation staying in place,” he said. “The question is how long can Thailand continue to buy rice at the rate it has set?”

The price of 100 percent grade-B Thai rice, the benchmark for Asia, has gained 21 percent since the July 3 election on expectation that Yingluck would resurrect a policy first introduced by her brother, Thaksin Shinawatra.

About 35 percent of Thais made their living growing crops last year, according to data from the Office of Agricultural Economics. During the election, Yingluck’s Pheu Thai party won 153 of 195 seats in the north and northeast, where incomes are about a third of those in Bangkok.

In 2008, when Thaksin’s allies were last in power and the government had a similar policy, it spent about 130 billion baht to buy 10.5 million tons of rice from almost one million farmers, according to the Bank for Agriculture & Agricultural Cooperatives. The government expects to use as much as 400 billion baht on the rice-price guarantee program, which will run from Oct. 7 until Feb. 29, deputy government spokeswoman Anuttama Amornvivat said today.

Funding for the rice program is not included in the government’s budget deficit estimated at 350 billion baht for the fiscal year starting Oct. 1, Kittiratt said yesterday.

“We’ll take the rice in as working capital so it is not an outright budget,” he said.

Losses from selling rice below purchasing costs in 2008 were estimated at 43 billion baht, data from the bank showed. Former Prime Minister Abhisit Vejjajiva’s government spent 47 billion baht in 2009 on income support for farmers, according to the bank.

Local prices rose to a record 17,000 baht per ton in April 2008 and export rates hit an all-time high of $1,038 per ton the following month after India, China and Vietnam curbed shipments, spurring unrest from Haiti to Egypt...

...The USDA raised its estimate for global rice production to a record 458.4 million tons for the 2011-2012 crop, buoyed by larger expected harvests in Brazil, China, the Philippines and the U.S., according to a Sept. 12 report. That would be a second year of record supply, outpacing consumption and lifting ending stocks to the highest level in nine years, the USDA said.

Global trade in rice is estimated to fall 4.2 percent to 31.8 million tons next year, the USDA said.

“As we go forward, demand and supply fundamentals are going to come to bear,” Ofon said. “There isn’t a shortage of rice in the market. We’re actually seeing a decrease in per capita consumption of rice in this region. As people get richer they switch from rice to other higher protein meals.”

There are obvious implications beyond just the domestic here – we’re going to see food inflation accelerate across the region. More importantly, I’m dubious about the effectiveness of this policy. Essentially, what Thailand’s government is doing is a de facto transfer from taxpayers to rural farmers – a populist policy. Nothing wrong with raising rural incomes, but the problem here is one of sustainability. Can the Thai government take on a permanent commitment to this rice subsidy (for that’s what it is)?

I’m reminded of Malaysia’s attempt to “manage” the price of rubber and tin, an effort that eventually broke down in the 1980s from cheaper oil in the case of the former (which was used in the production of synthetics), and cheaper sources of supply (and declining Malaysian production) for the latter. If Ofon’s analysis in that last paragraph is correct, then long term this policy is doomed to eventual failure. Falling demand coupled with rising supply suggests continued downward pressure on the market price, and a price guarantee implies an ever increasing government commitment – never mind the bogus attempt to keep it off the “official” budget.

If the Thai government is truly committed to raising rural incomes, wouldn’t a better policy be one of direct transfers, especially coupled with investments in rural infrastructure and “green revolution” technology? That better addresses the future needs and earnings potential for rural Thais, instead of this highly distortionary market intervention that only provides the illusion of higher rural incomes and effectively penalises urban taxpayers.