Rice Mortgage Scheme: The Real Story

Vuttiphol Wanglee

Part I: Prelude to Rice Mortgage Scheme

Source: FAO Market Monitor

• World rice supply has outstripped demand for the past 7 years • Closing stocks is at 12 year high • More supply -> cheaper price • We have been in the buyer’s market for the past 7 years • Farmers get poorer in this market condition

Facts About World Rice Industry

Price trend reflected abundant supply

Lower Price, Lower Income

Conclusions:

• Without government interventions, Thai farmers will be poor (88 Baht/day income*)

• To tackle this problem:

– Democrat Party uses Income Guarantee Scheme

– Puerthai Party uses Rice Mortgage Scheme

*From government publishing: ‘Deep and Real Understanding of the Rice Mortgage Scheme’

Part II: Subsidy Programs

Farmers Farmers

Rice Mortgage Scheme Income Guarantee Scheme

Assumption: Government guarantees income at 10,000 Baht/Ton

Assumption: Government guarantees to buy from farmers at 10,000 Baht/Ton

Comparison

Get 5,000 Baht Extra Sell 5,000 Baht/Ton

Rice Mill Buys at 5,000 Baht

Government pays 5,000 Baht extra

Farmer sells to government and get 10,000 Baht/Ton

Government buys at 10,000 Baht/Ton Rice Mill has to buy

at 10,000 Baht/Ton

Government sells G2G, private companies, or release to domestic market

Export Profit/Loss depends on world rice price

Source: Thairath

Objectives of Subsidy Programs

Rice Mortgage Scheme

• To lift Thai farmers’ well being

• To create stability of Thai economy through increased domestic consumption

• To increase Thai rice price

• To control world market price

Income Guarantee Scheme

• To lift Thai farmers’ well being

• To create stability of Thai economy through increased domestic consumption

• To allow market mechanism to dictate rice price

• To encourage export

Source: Department of Internal Trade

Part III: Outcomes of the Rice Mortgage Scheme

Successfully Maintain Farm Income at Historic High Level

Source: Bank of Thailand

Successfully Increased Thai Rice Price

Source: Oryza

Thai fragrant rice is 135%

more expensive than

Vietnamese fragrant rice

Thai white rice is 36% more

expensive than Vietnamese white rice

Miss export value target

Vietnam

India

Thailand

Value Decline: 23.7% in 2012 10.26% in 2013

Source: TDRI

Export Volume Ranking Down to # 3

Source: USDA

-35%

-13%

Rice stock at highest level causing quality to deteriorate

Source: USDA

An Expensive Scheme

Source: Krungtaep Turakit

Loss 136 Billion Baht

1. Some people uses farmers’ right to

mortgage rice

2. Rice Mill/Farmer mix low quality rice

3. Rice Mill cheats farmers by wrongly measure

moisture

8. Corruption through rice

sell

Corruptions Increases

Source: Thairath

Conclusions Pros: • Successfully maintains farm income at high level • Successfully stimulates economy in the rural area • Successfully increase Thai rice price Cons: • Export volume and value decline significantly • Quality of rice decline (milling, storage, and mixture of sub-

par rice) • Expensive budget • Level of corruption has increased

– Millers gain profit through using farmers’ rights – Millers gain profit through mixing low quality rice to mortgage – Only well connected firm gets warehouse rice cheaply

“If any government thinks they are living above the market, they are living in a fool’s paradise,” - Tejinder Narang, an advisor to one of India’s largest grain exporters, Emmsons International

“I do not know a single independent economist who

thought Thailand’s rice plan would work” - David Dawe, a senior economist at FAO

Part IV: Corruption Evidences

1. Smuggled Rice into Government Warehouse

Source: Cambodia Rice Exports Association

Source: Reuters (Insight: Smuggling rice to Thailand - like coals to Newcastle)

Thailand has become Cambodian top importer through smuggling

Over 750,000 tons of rice smuggled to Thailand every year

“Up to 300,000 Tons of paddy were smuggled into Thailand in 2012” - Thon Virak, director of Cambodian state-owned rice exporter Green Trade

"Clearly shipments (to Thailand) started going up since the intervention scheme started. It is highly attractive for the neighboring countries to try and get as much rice across to Thailand as possible and supply into the scheme.” -Darren Cooper, Senior Economist at The International Grains Council in London

2. Favor well-connected firm

Company S Export Volume VS Thailand Rice Export

Company S Export

Source: Thai Rice Exporter Association: Exporter Ranking

• The increase capacity is equal to 1.3 Million Tons/Year (20% of total Thailand export)

Source: Buhler e-mail 19/6/2013

While Thai Rice export volume is coming down, the company is expanding at the fastest pace

Evidences suggesting an influential person in the ministry of commerce is using a car belong to that company

Source: http://www.naewna.com/politic/54168

Conclusions

• The scheme has its merit in helping farmers increase their income and stimulate rural economy

• But need to address the following issues: – How to encourage rice export – How to maintain good quality rice in storage – How to reduce corruption from top down – How to solve long term problem of expensive production cost

My Personal View: This scheme will work only if: • We can limit production/export volume among major rice

producing nations • Rice can be stored like oil with no effect on quality