The Thai baht’s rally to the highest level in 16 years is hindering exports from the world’s biggest rice shipper, curbing the government’s efforts to diminish record state stockpiles and threatening to increase its losses.
Overseas buyers have rejected attempts by the government to boost prices in dollars to offset reduced revenues as the baht has strengthened, according to Commerce Minister Boonsong Teriyapirom. Thai stockpiles are set to double to 11.6 million metric tons in 2012-2013 from two years ago, according to data from the U.S. Department of Agriculture.
Prime Minister Yingluck Shinawatra’s administration began buying rice from farmers at above-market rates in 2011 to boost rural incomes. While benefiting growers, the program has spurred the buildup of the biggest-ever stockpiles. Even as the USDA forecasts Thailand will regain its role as the largest exporter this year, displacing India, the estimated 8 million tons shipped would be about 25 percent less than two years ago.
“If it’s maintained at this level, our sales will definitely be seriously affected,” Boonsong said at his office in Nonthaburi, outside Bangkok on May 1, referring to the baht. “If we cannot sell to exporters, we might have to open bids here in Thailand for the local market.”
Thailand’s baht has risen 3 percent against the dollar this year, the best performance in Asia. It reached 28.56 on April 19, the strongest level since July 1997, and was at 29.69 today. The baht’s rapid appreciation and volatility haven’t always been justified by so-called economic fundamentals, and an “appropriate policy mix” would be used accordingly, the Bank of Thailand’s Monetary Policy Committee said on April 30.
“Any success in offloading stocks will result in heavy losses for the government,” said Darren Cooper, a senior economist at the London-based International Grains Council, which monitors global markets and promotes food security. “So the baht strength will merely add to what are likely to be very hefty losses.”
Thai farm exports may drop as much as 8 percent this year as the strong baht makes them more expensive, the state-backed Office of Agricultural Economics said on April 25. Rice, rubber, cassava and fishery products have been significantly impacted, according to Charuk Singhapreecha, director of KU-OAE Foresight Center, a unit of the office, which comes under the agriculture ministry. Agriculture accounts for about 12 percent of the economy, the largest in Southeast Asia after Indonesia.
The Bank of Thailand should cut its key interest rate enough to stop the baht from appreciating further, Boonsong said. The bank’s policy rate, held at 2.75 percent for the past four meetings, is projected to be 3 percent at the end of this year, the median estimate from 21 economists tracked by Bloomberg.
Higher rice reserves in Thailand may help increase global inventories to a record 173 million tons, according to the United Nations’ Food & Agriculture Organization, which forecasts that world production will exceed demand for an eighth year. The price of the Thai 5 percent variety has dropped 3.4 percent to $564 a ton this year, while rough rice in Chicago is little changed at $15.155 per 100 pounds.
By contrast, corn, wheat and soybeans in Chicago have all tumbled into bear markets, losing at least 20 percent from closing highs set in 2012, as producers boosted supplies after a U.S. drought last year hurt output.
The Thai government pledges to buy unmilled white rice at 15,000 baht ($510) a ton, and premium-grade fragrant rice at 20,000 baht a ton. That’s as much as 50 percent above market prices, according to data from the Thai Rice Mills Association.
Thailand spends about 300 billion baht a year to build up the inventories and has purchased more than 22 million tons of milled rice since 2011, government data show. Milled reserves in Thailand may jump 40 percent to 18.2 million tons in 2013, according to the Rome-based FAO.
Last year, Thailand sold about 8 million tons from the stockpiles, most to governments and the balance to state agencies and local buyers, Boonsong said. For this year, the ministry maintains an export target for 8 million tons, with at least 5 million tons to be sold to governments including China, South Korea and South Africa, he said.
The ministry has received 140 billion baht from rice sales since October and expects that to rise to 180 billion baht this year, Boonsong said. Losses from sales of rice stockpiled in the first year of the program will probably be lower than 80 billion baht, less than the income the government gained from boosting domestic consumption and an increase in value-added-tax income, Boonsong said, without estimating losses in the second year.
Boonsong rejected criticism over its cost from political opponents, saying expenditures are similar to a price-guarantee program implemented under former Prime Minister Abhisit Vejjajiva, who is now opposition leader.
“We spend on one hand and receive income from the other hand,” Boonsong said. “We will keep the program because it is the main policy of the government but will modify some of details,” he said, without being specific.
Rice exports fell 6.7 percent to 1.4 million tons in the first quarter, after tumbling 37 percent to 6.73 million tons in 2012, Ministry of Commerce data show.
Thailand faces a rising financial burden from the program as well as a shortage of storage facilities, and the government may have to sell grain at a loss, according to Concepcion Calpe, secretary of the FAO’s inter-governmental rice group.
A World Trade Organization agriculture committee, with members from the European Union and the U.S., raised concern at a meeting in March that the Thai rice program might breach domestic support limits and the government may offload the stockpiles by subsidizing exports.
“We are selling even higher than the market price in the world, so what’s there to argue about?” Boonsong said, rejecting criticism that the government may be violating WTO principles with the program.