July 30, 2012 / 5:57 AM / 7 years ago

COLUMN-Thailand's oxymoronic rice policy lives on: Clyde Russell

—Clyde Russell is a Reuters market analyst. The views expressed are his own.—

By Clyde Russell

LAUNCESTON, Australia, July 30 (Reuters) - If you ever want an example of oxymoronic economic thinking look no further than Thailand, which maintains it will remain the world’s top rice exporter while following policies that prevent this.

The government insists rice exports will hit 9.5 million tonnes this year, despite the halving of shipments in the first six months because of its populist intervention scheme.

The only way to boost exports in the second half would be to end the intervention and sell the record stocks of grain at market prices.

Even then it would be unlikely for Thailand to reach the target, given good harvests in buying nations such as Indonesia and China, coupled with strong competition from other major exporters India and China.

But instead of taking a pragmatic view of market realities, the Thai government decided to extend the intervention scheme for another three months until the end of September after it expired at the end of June.

And all the signs are that it may well extend it again to cover the main crop harvest in October, something that would add to the mountain of rice already stockpiled.

Thailand is almost certain to lose its status as the world’s biggest rice exporter to India, and it may even fall to the bronze medal slot behind Vietnam.

Inventories of the staple grain of about 60 percent of the world’s population now stand at about 17 million tonnes of paddy, equivalent to 10 million tonnes of milled rice.

To put that into perspective, the stockpile is almost as big as the record 10.5 million tonnes of rice Thailand exported in 2011.

First-half exports totalled 3.45 million tonnes, a drop of 45 percent on the year, and the Thai Rice Exporters Association believes 6.5 million tonnes for the year is a realistic target.

The government of Prime Minister Yingluck Shinawatra believes it can export more by doing government-to-government deals that bypass the market.

However, so far the only reported deal has been to sell 240,000 tonnes to the Ivory Coast, and terms weren’t disclosed, although a senior government official said special credit arrangements were offered to the West African nation.

SIMPLE MATHEMATICS

The problem for Thailand is simple mathematics.

It pays farmers 15,000 baht ($475) for paddy, which equates to about $792 a tonne for milled rice.

This is almost 37 percent higher than the market price of benchmark 100 percent B grade white rice RI-THWHB-P1 at $580 a tonne, but even this is not the true price of rice in Asia, with India and Vietnam selling a slightly lower grade at prices around $400 to $420 a tonne.

Even assuming the government could get the benchmark price of $580, it would mean the 10 million tonne stockpile would fetch $5.8 billion.

However, so far it has paid $8.075 billion for the rice through the intervention scheme, so even in the best case scenario the government is facing a loss of $2.3 billion.

Assuming the main harvest in October does yield the government’s forecast 25.9 million tonnes of paddy, this would cost a further $12.3 billion to buy.

By the end of the harvest, the Thai government is facing the possibility that it will have spent more than $20 billion on rice and sold very little of it.

Perhaps it would be better to pay the farmers not to produce, or to do what the European Union is trying, by de-linking subsidies from production.

Although following the example of the EU, which spent 57 billion euros ($70 billion) on agricultural subsidies in 2010, is probably not a good idea, given it does little to improve food security or lower costs for consumers.

The main problem is that the Thai government doesn’t seem to realise that the longer the subsidies go on, the bigger the stockpile becomes, making resolution more difficult and costly. (Editing by Clarence Fernandez)

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