Aug. 23 (Bloomberg) -- For Thai Prime Minister Yingluck Shinawatra’s ruling party, keeping the farmers that form its political base happy is more important than retaining the country’s 30-year position as the world’s top rice exporter.
Shippers including the 100-year-old Kamolkij Group and opposition politicians have vilified the government’s policy to buy rice at above-market rates, saying the measure is putting exporters out of business and encouraging corruption. Officials say the price-support stance declared in parliament a year ago today is boosting the economy and helping the third of the population that depends on rice farming.
“Ninety-nine out of 100 want the government to continue this rice program,” Commerce Minister Boonsong Teriyapirom said in an interview last week. “The more success we receive from this policy means a worse scenario for the opposition.”
Parties linked to Yingluck’s brother, former Prime Minister Thaksin Shinawatra, have won the past five elections on support from rice-growing areas that are poorer and more populous than the rest of Thailand. While the rice policy helped the country’s gross domestic product expand more than expected in the second quarter, its ability to sustain that growth remains in doubt.
“In the long run, if the program is kept as is, it will impact the fiscal policy space and therefore pose a risk to the ability to spend on infrastructure,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. “The key question is whether there are better ways to spend 1 percent of GDP worth of money on more growth enhancing and equality-improving activities.”
Under the program, the government guarantees it will pay as much as 15,000 baht ($477) a ton for unmilled white rice, which accounts for more than 70 percent of all exports, and 20,000 baht a ton for a higher-quality variety. Yingluck’s administration plans to spend 260 billion baht in the next fiscal year to purchase the grain, Boonsong said, an amount equal to 11 percent of total expenditure.
The program will cost “roughly” 100 billion baht because of the cost of exporting the rice at a loss, Boonsong said. The government spent about 260 billion baht to purchase 16 million tons of unmilled grain from about 2 million farmers since the program began in October, he said.
An income-support program implemented by the previous government, headed by now-opposition leader Abhisit Vejjajiva, provided about 67 billion baht in direct payments to 4 million rice farmers in the 2010-2011 production year, according to the state-run Bank for Agriculture and Agricultural Cooperatives.
The current program’s cost could rise to 200 billion baht after accounting for losses and storage fees for the grain, according to Kiat Sittheeamorn, an opposition parliamentarian.
Abhisit’s Democrat party has received complaints from farmers who say some millers refuse to pay the guaranteed price because of high moisture content or other impurities, he said. Farmers are forced to accept lower rates because they can’t afford to pay additional transport costs to take the grain to a competing miller, he said.
“If they spend the money and it reaches the poor people, I don’t mind,” Kiat said of the government’s rice policy. “But that’s not what’s happening here. All the budget spent is not reaching the farmers.”
Prices of unmilled white rice obtained by farmers averaged 10,035 baht a ton this year through July, compared with 8,400 in 2010, the last full year Abhisit was in power, according to the Office of Agricultural Economics.
Groon Tohchai, a 66-year-old farmer from Nakhon Sawan, Thailand’s largest rice-producing province, received 12,800 baht per ton for his paddy, up from about 10,000 baht per ton last year. He used the extra cash to renovate his house and buy gold.
“Although I didn’t get the maximum guaranteed rate of 15,000 baht, rice prices are higher than before,” Groon said by phone. “I’ll definitely join the program again in the coming year as it helped boost rice prices, increased family income and lowered debts.”
Thai policy makers this week called for accelerated government spending in the second half of 2012 as economic growth may be weaker than previously forecast due to a global slowdown that is hurting exports. Southeast Asia’s second-biggest economy expanded 4.2 percent in the three months through June from a year earlier, exceeding all 16 forecasts in a Bloomberg News survey that had a median prediction of a 3.1 percent rise.
The rice policy “helped boost the economy in the first and second quarter,” Arkhom Termpittayapaisith, secretary-general of the National Economic and Social Development Board, said on Aug. 20. “The policy is right because it is designed to help farmers. We have bought at a high price, so we need to find the right timing to sell it.”
Guaranteed profits for rice farmers was among policies directed at lower-income voters that helped Yingluck’s Pheu Thai party win a majority in elections last year to fill Thailand’s 500-member parliament. The party took 149 of 189 constituency seats in the north and northeast, while the Democrat party won 16 seats in those regions, where incomes average about a third of those in Bangkok.
The north and northeast accounted for about 70 percent of rice production last year, according to the Office of Agricultural Economics. The south, an opposition stronghold, produced about 1.6 percent of the country’s rice.
In 1981, Thailand introduced a policy to allow rice farmers to pledge paddy as collateral for loans if they wanted to delay selling their crops to get better prices. After taking power in 2001, Thaksin started raising the pledging price above market rates to boost farmer incomes, according to the UN’s Food and Agriculture Organization. He was ousted in a 2006 coup and has lived overseas since 2008 after fleeing a jail sentence stemming from charges brought by a military-appointed panel.
Record Thai stockpiles are now pressuring global prices as traders bet the Southeast Asian nation will soon sell off supplies. The U.S. Department of Agriculture expects Thailand’s stockpile of milled grain will climb to 12.1 million tons in 2012-2013, exceeding the amount Thailand exported last year.
That will prevent prices from rising even as droughts push corn and soybeans to record highs, according to the Thai Rice Exporters Association, which has seen its membership fall to 192 companies after 15 stopped trading rice this year. Rice shipments by Thailand are estimated to tumble 35 percent to 7 million metric tons this year, the lowest since 2000, the FAO said Aug. 6. That compares with Vietnam’s 6.8 million tons and India’s 6.5 million tons, it said.
“Now we have stockpiles that are big enough for exports the whole year without having to grow rice,” Charoen Laothamatas, the association’s vice president, said by phone. “How can the price go up?”
Thai 5-percent white rice will drop 15 percent to $480 a ton by Dec. 31, according to the median of 10 estimates from traders and analysts surveyed by Bloomberg earlier this month. While Yingluck’s administration doesn’t disclose prices in sales to other governments, Boonsong said the average price of all rice sold overseas this year has topped $600 per ton -- below the break-even price of about $750 per ton for white rice and up as much as 20 percent from last year.
“We have to concentrate on our animal feed and warehousing businesses to offset a decline in exports of parboiled rice,” said Korbsook Iamsuri, chief executive officer at Kamolkij Group and president of the Thai Rice Exporters Association. “We’re worried that government intervention will drive exporters out of business and jeopardize the rice sector.”
As exporters see profits drop, farmers welcome the policy. A survey of 1,200 rice farmers conducted last month by the University of the Thai Chamber of Commerce found that 80 percent plan to join the program again in the crop year starting October because they will get higher prices.
While the policy is popular, the government should soon invest money in improving education and building roads and railways to help the country benefit from a regional agreement that will lower trade and investment barriers in 2015, according to Thanavath Phonvichai, an economist at the university.
“The rice policy is OK in the short term, one or two years,” he said. “In the future the government is supposed to put the money into programs that will make Thailand more competitive. We need to prepare ourselves.”