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19 June 2013
Read in Minutes


Sustainable rice prices are set by the market

Minister of Commerce Boonsong Teriyapirom is under fire for his lack of transparency in disclosing information about the losses incurred by the rice-pledging scheme.

Instead of providing any proper answers to the direct questions on the total losses, the minister has been evasive and has refused to give any numbers, while still denying the scheme has lost up to 260 billion baht.

The minister has defended the scheme on the basis that it has made rice farmers better off financially and, as a result, also fuelled the economy through their spending.

However, he failed to mention that the substantial fall in rice exports has also put the brakes on the economy.

It is not that the ministry does not know the figures.

Three months ago, Deputy Commerce Minister Nattawut Saikuar disclosed in parliament, while answering questions on behalf of Prime Minister Yingluck Shinawatra, that the government had sold 7.072 million tonnes of rice acquired by the scheme for 97.238 billion baht.

Although Mr Nattawut was quick to point out that it was too early to conclude the exact losses, the 7 million tonnes comprised more than half of the rice stockpile acquired by the scheme during the first fiscal year (2011/12). So it should be indicative of the government’s performance.

My simple calculation yields an average selling price of 13,750 baht ($460) per tonne, which seems to be in line with the world price for white rice in 2012.

However, if that 7 million tonnes of rice consists of a significant amount of jasmine rice, which is in great demand both domestically and abroad, it is very likely that the government sold its rice at an average price well below that of the market.

The ministers’ circus performance last week was instead a symptom of a politician’s “communicable disease” _ the unwillingness to admit or deliver bad news to the public because they could sense the dangerous implications.

From the beginning of the scheme, the government came up with two major promises.

One promise, which has been fulfilled, is guaranteeing high prices for farmers.

Over the past few decades, rice price intervention has been notoriously corruption-prone, resulting in farmers receiving only meagre benefits.

One TDRI study showed that, on average, farmers reaped only about 17% of the total mount of money spent on this type of scheme, mainly because the power to choose whose rice to buy lies in the hands of the mills selected for the scheme.

As a result, these mills often cited reasons of quality to cut their actual buying prices to levels only slightly better than the market price.

Remarkably, Pheu Thai’s “pledging every grain of rice” scheme has fundamentally solved this problem. Although there are still complaints here and there, most farmers have received the guaranteed prices minus the normal quality deductions.

As of now, it is still the case that the total benefits which the farmers have received _ estimated at between 86-120 billion baht annually, due to guaranteed prices higher than those of the market _ account for more than half of the losses incurred by the government.

The Ministry of Finance has estimated the losses at 136 billion baht in the first year, although the realised losses will increase if the government fails to sell its stockpile in a timely fashion.

The government also made another promise: as the sole Thai rice buyer, it would have enormous market power that would enable it to export rice at higher-than-market prices.

The government claimed the losses from the pledging scheme would not exceed that of the “income guarantee” scheme administered by the former Democrat-led government, even though this government has elevated pledging prices to record levels.

So far, the government has failed to deliver on this second promise.

In fact, based on the 7 million tonnes of rice sold as disclosed by Mr Nattawut, it reveals the government has done far worse than the market.

The result comes as no surprise. It is unimaginable to expect that any responsible foreign governments would buy a large amount of Thai rice above the market price.

Governments are supposed to be accountable to their taxpayers.

The baht appreciation in recent years has also made matters worse.

As for the domestic market, numerous traders have refused to bid above the market price, especially given that they have been unsure about the quality of the rice in the government stock.

Simultaneously, the government seems to be concerned about the increasing costs of living faced by consumers, so it is more likely that it would be willing to release its rice stock to the domestic market at rather low prices.

So far, Mr Boonsong has tried to downplay the loss figure by reporting a low sales figure, and valuing the rice stock “at cost” _ which is clearly higher than its value on the open market.

As a result, they have been able to produce a loss figure that is lower than that of the former government. However, it might not help them much since even the Minister of Finance has refused to accept their number.

So what can the government do? In the short run, the government should lower the pledging prices of 15,000 baht (for white rice) and 20,000 baht (for jasmine rice).

These prices are simply the result of political distortion and they are too high to be sustained.

In addition, as soon as the government buys the rice from the farmers, it should routinely put the stock to an open bid. This way, the losses incurred would come from the price subsidy and not from inefficiency or corruption.

In the long run, the government should not attempt to push up rice prices. A sustainable price is determined by the market, not the government.

The only obligation for the government is to help rice farmers cope with unanticipated price shocks.

This can be done by setting the target price based on the average market prices over the past three years, for instance, and implementing a price insurance scheme or a deficiency payment scheme that would compensate the farmers only when the actual price falls well below the target price.


Viroj Na Ranong, PhD, Research Director at the Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

First published in the Bangkok Post, 19 June 2013