The Thai government may sell most of its stockpiled rice to ethanol and animal-feed producers because it's no longer fit for human consumption.
Doing so could reduce supplies from the world's largest exporter of the grain and help push up prices to levels not seen since 2013, traders say.
Authorities will decide in about a month how to dispose of millions of tonnes of poor-quality rice that was purchased under the previous government's costly pledging programme, Deputy Prime Minister Pridiyathorn Devakula told reporters on Friday in Bangkok.
Of the existing stocks, the government now controls 10 million tonnes of low-quality grade-C rice, with rotten rice making up 2 million tonnes, he said.
The decision will be based on whether the government can secure a good price.
"Previously the private sector proposed purchasing 2 million tonnes of rotten rice at five baht a kilogramme, but that offer was too low," MR Pridiyathorn said. "The government hopes global rice prices will edge up before it disposes of 12 million tonnes of low-quality and rotten rice."
A reduction in Thai inventories would cut global supply just as an El Nino weather pattern threatens to parch crops across Asia.
The millions of tonnes of rice still in stockpiles in warehouses across the country account for 37% of the global rice trade.
"It will take big burden out of global rice supply," said Mamadou Ciss, who has been trading grain for 30 years and is the president of Alliance Commodities (Suisse) SA in Geneva.
"This will be bullish to the rice market and we could see prices rising to $500 a tonne or more." That would be the highest since August 2013.
The price of Thai 5% broken white rice has fallen 9.3% this year to $379 a tonne, the lowest since January 2008.
State reserves currently stand at about 16 million tonnes, up from about 2 million tonnes before the Yingluck Shinawatra government began buying supplies directly from farmers at inflated prices in October 2011, government data show.
The government is considering whether to sell 13 million tonnes of poor-quality rice to makers of animal feed or ethanol, or whether to sort the grain into different grades before any sale, Duangporn Rodphaya, director-general at the Department of Foreign Trade, said on Friday.
"Grading the rice is quite costly, and selling to the industrial sector is a better way out," she told reporters.
A further 2.6 million tonnes would be sold gradually for human consumption, she added.
Separately, the government plans to sell 1.07 million tonnes of rice at an auction on June 15. Since taking power in May last year, the military government has offloaded about 2 million tonnes of stockpiled rice.
The El Nino weather pattern may reduce rain-fed rice production in South and Southeast Asia, according to the Rome- based Food & Agriculture Organization.
El Nino is caused by periodic warmings of the Pacific and can roil agricultural markets as farmers contend with drought or too much rain.